I am trying to figure out how my accountant has accounted for expenses associated to my non-rental long term homes.
Say at year end I have 5 homes n inventory and sold one house I had held for over 1 year
Furthermore, say the total expenses for the 6 homes was $10k. Is it common practice to adjust the cost basis for the sold home by the whole 10k. Is this now you capture expensive against non rented homes in inventory. How are they captured if no sale took place. By expenses I mean bad water insurance.ect.
I'm having a bit of a tough time understanding your question, but it may be because I'm having a tough time wrapping my mind around allocating all of the costs to one house.
Let's say you are a widget manufacturer. You make the same widgets using standard parts and it always takes the same amount of time to make a widget, so there's standard labor costs as well. At the end of the week, you've made six widgets for a total cost of $600 or $100 each. If you sell one of those widgets the following week, you recognize $100 of cost because each widget has $100 of cost allocated to it. You don't recognize $600 of cost
Now let's say you pull one of the five remaining widgets off the shelf and you customize it using another $25 in parts and labor. You then sell that widget. You now recognize $125 in costs.
The issue here is that houses are not widgets. They are each a unique item. You can't say, for example, that you have 10 houses in inventory and you paid a total of $1 million for them so each house has $100,000 of costs associated.
Instead, you allocate specific costs to each house. Sure, if you stuck the same refrigerator in each house, you could allocate, but then if you also put a new toilet in one, new floor in another and a new deck on a third, you would not spread those costs among all the houses. You would add each specific expense to each specific house and then recognize the total value of the house as an expense when you sell.
If no sale takes place, you do not have any expenses. You just have an increasing value to your inventory. For example, if you're paying utilities on a house you're holding in inventory, you do not recognize Utility Expense. You just add that to the total value of the house as "basis" and then it all gets recognized as cost when you sell.
The only time you really have expense when you haven't sold a house out of inventory is, for example, accounting and tax work. This is an expense that is incurred for preparing prior year information and taxes and is an ongoing, normal expense and isn't really specific to one particular property. Something like Business Cards or Dues & Subscriptions is another thing that you might expense without having sold a house.
Does this answer your question?
Throughout the year, water bills, insurance bill and the like have been paid on the houses in the portfolio. These are not rental homes, rather inventory for long term gains. How are those expenses accounted for during that tax year. Are they applied to offset the gains on any sold long term house sold? It is my understanding that only closing cost expenses are carried forward to the next year. These are more like operating expenses.
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