Hi Bigger Pockets,
We have a duplex that was out of use for 7 years. We have fixed it up and have it rent ready. We replaced roof, bathrooms, flooring, windows and here is the dilemma. Can the w-2 wages I paid my employees to make these improvements be included as part of the basis since they worked directly on the roof, bathrooms, flooring, etc???? Obviously if the entire roof was contracted out, labor would have been included as an improvement. Is it any different just because my employees put on the roof?
I do not want the w-2 wages expensed this year, but added to the basis.
Do you have W-2 employee for the entity that holds this house? If you have a W-2 employee on a payroll for your RE ventures and this house is owned by the entity, you can prorate the W-2 salary that relates to the time they spent on the house ( any reasonable method) and add that to the basis ( capitalize) and deduct the remaining W-2 wage as a salary expense for the business. You cant both add the part of the wage to the basis and also deduct as salary expense.
Are they your W-2 employee from other business you have and you have them work on your house?
This can get complicated if you just used your employees from your other business to improve the house,
We do not know the full picture to help you. More info would be helpful.
You cannot deduct the W-2 wage on your business books and also add the same balance to the basis of the house.
The house is owned by our entity Jnt Properties, inc. and employees also work for JNt Properties, Inc.
Does that help?
The short answer is yes. Not only you can - you must - capitalize labor specifically attributed to making improvements to your properties. Whether you paid it via W2 or 1099 - the rule stands.
Notice the "specifically attributed" qualifier, which is what @Ashish Acharya referred to, as well.
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