Calculating basis on a Flip when 401(k) loans are involved?

[Account Closed]

I have a flip I am finishing up. My wife and I took out two 401(k) loans - $50k and $30k - to purchase and rehab it. Let's say the ARV is $120k. Would the basis be the ARV less the cost to purchase is ($50k) and the cost to rehab it ($30k) or would it be the outstanding balances of these two loans? On paper, we paid cash and there is no mortgage so I am inclined to say that it boils down to the purchase cost and the cost of improvements, not the outstanding balance associated with the loans. I am asking this because if it is the latter then we will have more taxable income on the property. Also, this seems like a grey area because, well, we are paying ourselves interests on the loan so it seems like double dipping but also seems legit too. Thoughts?

[Ashish Acharya]

Originally posted by @Account Closed:

I have a flip I am finishing up. My wife and I took out two 401(k) loans - $50k and $30k - to purchase and rehab it. Let's say the ARV is $120k. Would the basis be the ARV less the cost to purchase is ($50k) and the cost to rehab it ($30k) or would it be the outstanding balances of these two loans? On paper, we paid cash and there is no mortgage so I am inclined to say that it boils down to the purchase cost and the cost of improvements, not the outstanding balance associated with the loans. I am asking this because if it is the latter then we will have more taxable income on the property. Also, this seems like a grey area because, well, we are paying ourselves interests on the loan so it seems like double dipping but also seems legit too. Thoughts?

1) Generally, your cost (Basis) would be your purchase price and rehab cost that needs to be added to the cost. 

2) You can deduct the interest paid on the loan in your tax return as business interest expense as well. Need to be presented correctly depending on if you have entity or not.