Do carrying costs increase cost basis?

Question

I'm having trouble finding a definitive answer on this. Assuming I purchase a house with the intent to fix and flip in a 6 month window, do the carrying costs I pay increase my cost basis, such that my taxable profit is decreased?

So, for example, assume

Purchase 80k

Rehab 20k

Closing 5k

Carry 10k

ARV 175k

Sell commissions/fees 15k

Would my taxable profit be 45k (carry costs included) or 55k (carry costs excluded)?

Thanks!

Henry Clark · Answer

Talk with your tax accountant.  As noted above if eligible.

Key question is will you live in it during rehab or rent it out?

If this is a purely investment property and you don’t live or rent it out during construction then the carry costs will be part of your short term capital gain calculation.

If you live in it, depending on your tax position these carrying costs may or may not be deductible.  Probably not.

If you rent it out, then they probably will be deductible.

Peter Mckernan · Answer

Carrying cost loan (closing costs on loan and interest), utilities, etc can be written off from a tax standpoint to reduce your liability/

Jake Baker · Answer

@Rob Hendricks

Here is what I typically do with my clients. When you purchase the house, closing costs go on the balance sheet. When you sell the house (flip) it moves to the P&L. Carrying costs aka holdings costs, such as hard money payments, can be written off in the year that they happen. Either way, in the end, it ends up on the P&L when you sell.

There are flip situations where the sale happens in the following year:

Purchase November 2023. Sale March 2024.

In this case, some CPAs are okay with carrying the holding costs to the next year as "inventory" since a flip can be looked at as a cost of a good to be sold.

JD Martin · Answer

Your basis is going to be your cost of ownership on day of closing. The other costs are going to be losses on your taxes against any gains if eligible.

Do carrying costs increase cost basis?

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