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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29580
Experience:  Taxes, Immigration, Labor Relations
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I am a carpenter, in 1986 I bought a house lot with a 15K mortgage

Customer Question

I am a carpenter, in 1986 I bought a house lot with a 15K mortgage and then built a house slowly, out of pocket, while living there. So there was no purchase price for the entire home. In 2007 I bought a place in Vermont with a first mortgage of 155K on the first home in New Hampshire and have been renting out the NH property, which I plan to sell eventually but I am now concerned about the tax, I was not aware of the residency requirement, so two main questions, 1) does the first mortgage, currently 130K owed, reduce the profit, and 2) how can I prove the cost when so much was so long ago?
To expand on question 1, if i sold it right now for 300K, would the profit be reduced by the 130K I owe on the mortgage?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
Hi and welcome to our site!When you took the mortgage - that amount was not included into your taxable income - correct?That is because you were expected to pay it back.So - when you eventually pay it back - that amount is NOT deducted.However - you might be able to deduct mortgage interest and some other costs associated with that mortgage - but when you pay back the principal - that is not deductible..Regarding your first NH property - that is your rental property - correct?So - you would need to report the sale transaction on your tax return.Your will have to report separately the sale of the land and the building - as two separate assets.The gain will be original purchase price - for the lot and the building cost for the house - only the cost of materials and payments to contractors will be included into the basis - the value of your time is not considered.The basis will be adjusted by additional improvements (plus) and depreciation for the time the property was rented (MINUS) - so you will come up with adjusted basis.
Expert:  Lev replied 2 years ago.
The gain will be calculated as
(selling price) MINUS (adjusted basis)
As that property was owned more than a year - the gain will be taxed as long term capital gain - at reduced tax rates - for most taxpayers - not more than 15%.
So if you sell for $300k - that woudl be your selling price.
You would need to determine the adjusted basis as discussed above - and add your selling expenses (Realtor's fees, inspections, closing costs, etc.)
Mortgage repayment woudl not affect calculations and your taxable income will not be reduced by that amount.
.
Regarding proving your costs...
First of all - you do need to keep your records for all expenses.
If you do not have such records - you might want to re-establish it - be reasonable.
In general - the IRS doesn't require actual receipts for expenses below $75 - so your personal records might sufficient.
Second - you do not need to send your supporting documents to the IRS - just keep for your records.
ONLY if audited - you would need to provide supporting documents.
.
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