What costs can I add to my cost basis when selling a property?

Question

Trying to decide if its worth the 1k fee, and the hassle of beating the 45 day window to find a replacement property that the 1031 rules call for....

Bought the property for 112k, and it will sell for 148k

I am crediting the buyer back 6k in closing costs

My agents commission will be about 7k

I have spent about 17k in rehab costs and repair costs since owning this property over the last two years.

Can I deduct all of these costs when against my proceeds when I do my taxes for a conventional sale? I read somewhere that if I wrote off part of those rehab costs in a prior year I cannot include them when the property sells. I also read that I have to "give back" the depreciation write offs. Anyone have an idea whether either of those are true, or whether we can deduce agent commissions to proceeds for regular sales?

Dave Foster · Answer

@Amir Navabpour, when you're looking at a 10-18K tax bill, $1K (and prolly doesn't have to be that much) to explore a 1031 isn't a bad option even if you can't find a property within the 45 days. Best case is you get to keep using that 10-18K in taxes for yourself. Worst case is you spend 1K and it becomes a cost of the sale so reduces your tax liability as well. And if you can find a less expensive exchange for a sale that small even the better. In real terms you could be looking at spending less than $500 (after tax impact) to take a swing at saving a bunch more. We just completed an internal audit for 2019 and found that less than 10% of all exchanges started ended up not completing. Those are pretty good odds in your favor if you want to keep investing in real estate.

Natalie Kolodij · Answer

IF you expensed a repair/renovation it can NOT be added to your basis and deducted. You would be getting a tax deduction twice.

If you did any big repairs that were added to your depreciation schedule- those increase basis, or if you do any repairs to get it ready to sell, those get added to your basis.

Okay so 148- 112 = We're at $36k

You're paying 13k in closing costs- now we're down to $23k

BUT how much depreciation did you take? You bought it for 112k but you've depreciated 20k then the calculation would be 148- 92= $56k. And the $20k worth of that gain that's dueto depreciation will be at ordinary income tax rate vs. capital gain rate.

But in short- we need to know how much depreciation was taken on the property.

What costs can I add to my cost basis when selling a property?

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