JD Martin wrote: Aside from that, a couple of things don't make sense:
1. You only pay capital gains on profits. If you spent $10k buying the property and $40k fixing the property and sold it for $55k you didn't have enough profit to pay $8k in capital gains, even after recapturing depreciation. So something is wrong with this equation.
Im so glad to hear this. My tax lady, who by the way did warn me before selling the property that I would have to pay capital gains, but she didnt say how much. I read its 15% and assumed I would have to pay 15% of the 55K, so that's where Im getting the 8K figure from. I hope you're right, because after not being able to deduct hardly any of the money I spent for the rehab, and now having to give the IRS all this money, Im just about ready to throw in the towel.
2. Repairs vs. improvements is only disallowed if the IRS audits you and reverses your filing. The IRS issues guidelines on what constitutes a capital improvement vs a repair, but it is up to you to file based on how you believe it fits. Completely replacing a roof constitutes a capital improvement, that's a clear one. But lots of other things are a judgement call. And for small owners the IRS gives you a lot of leeway to declaring repairs vs. improvements through safe harbor. If you filed everything as an improvement and depreciated it, you either need a different accountant or should have done it differently yourself.
Well, maybe there is leeway, but i wasnt luckey enough to find an accountant that had the balls to challenge the standard. There is plenty of information out there regarding what is considered a repair vs improvement and I wasnt about to go f'ing with the IRS and get myself in trouble with an audit so nope, I thought it best to stick to the standard. For example, I paid 8K to upgrade the electrical on the house. Guess what that is considered? A friggen improvement. Im sooooo done.
