Bought a fixer - Now what?

Question

We're excited, we just closed on a foreclosed cottage in a resort area in northern Michigan.  The property needs some work, but right now cash is tight.  However I'm a very handy guy.  Here's my question/concern/problem:

How can I go about providing the labor to bring the place up to snuff without shooting myself in the financial foot.  I'd want the value of my labor to reflect in the total cost basis of the property for tax purposes when I sell.

Any suggestions appreciated.

Jeff B. · Answer

• "Bought a fixed - Now what?"

hmm; This would drive me crazy, to think I would take the first step without knowing each step in the path to the final sale.  That's not saying 'Got to know everything', but at least need to know "what's next".  I gave up on short sales in Calif because there's a law regarding 'Purchasers of Equity' with real teeth in it, so the business of intervening in foreclosures in Calif is very risky.

Count the cost before you begin . . .

Chris Soignier · Answer

If you want the value of your sweat equity to be reflected in the cost basis, you need a non-passthrough entity to pay you personally for the work.     That would be self-employment income taxed at your marginal ordinary income tax rate, plus ~15.3% self-employment tax.     Or you could just forget about adding your sweat equity to the basis, and if you keep it over a year have the entire profit taxed at your cap gains rate (likely 15%).

Linda Weygant · Answer

During audits, the IRS tends to look at the substance of an issue in addition to the form.  Basically what will happen is that if you try to skirt the IRS laws regarding adding your own sweat equity to the basis of the house, they will likely unravel however many companies and entities you've thrown up to get around the tax laws.  They're actually quite good at it, but they are slow.  I've seen them go back to people 8-10 years after a transaction and start making inquiries.

Remember, the IRS can do an audit back 7 years to query something that has thrown up a normal red flag.  But they are not limited at all in going back if they suspect fraud and have been known to go back decades when unraveling particularly large fraud schemes.

Your best bet is to stick to a budget, sell for as much as possible and your sweat equity will be repaid at sale with a higher selling point.

Stone Teran · Answer

Unless you are operating out of a c-corp (or equiv) which you're not, paying yourself or other tricks to add your labor to cost basis does nothing for you.

>Bought a fixed - Now what?

Fix it!

and quit screwing around on biggerpockets hehe

Dan Madden · Answer

Stone:

Ok I "binged" C-Corp which led me to another entity called "Qualified Personal Services Corporation which led me to a state of confusion.  Conclusion - I need to get with a CPA.

Ya, I would much prefer working on it than being on BP, except for the fact that I live 2 1/2 hours away, it's Thanksgiving eve and for some reason my wife expects me to be around tomorrow.  LOL

Dan Madden · Answer

Thanks James, I understand all that.  My property is a Hail Mary (long pass) from the largest inland lake in Michigan.  I'm thinking of popping the top and putting a second floor on with an upstairs deck so I can see the lake.   My house is cute but it's the least house in the neighborhood.  House across the street was torn down and in it's place a gorgeous McMansion has risen, probably pushing $1 million in value.  Serves as a great visual motivator to where I want to be down the road.

Dan Madden · Answer

Pretty much agree except I'd have to give myself an IOU or stock.  LOL

James S. · Answer

First you must see what the after repair value would be and dont spend over that. Look at comparable homes in the area that have sold recently to see what your house will be worth when you fix it. If homes in the area dont have tile flooring dont install Tile if homes dont have granite dont install granite

Joshua D. · Answer

@Dan Madden

I'm not sure there is a good way to do that with out setting up a company and paying yourself a wage.  this come at many other cost and considerations. I would advise spending some time and money with a good cpa.

Bought a fixer - Now what?

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