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Tax deductions for building


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Marty's Forum Posts: 1

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By Marty in Indian Trail, NC on 1/3/2005


I am an owner-builder who started building in Feb and finished in Dec. Since I did it myself, are there any special deductions I can take for the year? Or is it still the basic deductions you'd get buying any house (points, interest, etc.)

Thanks.

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By Paulita in Aptos, CA on 1/5/2005


If this is a primary residence you can only deduct the interest on the first $1 million in mortgage and you may deduct the property taxes you actually paid for the year. If you paid points out of pocket during the escrow period, these MAY possibly be deductible (certain criteria need to be met.)

If this is a rental, then there are other possible deductions.

However, as an O-B of primary residence, you should keep track of every penny spent... as this is what establishes the "basis" for your house. The basis is used in calculating your capital gain. But even if you are building for your own use... always save all the receipts since you NEVER know what may happen in the future. This could turn into a rental. Who knows!


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By Peter in Gilford, NH on 1/9/2005


Paulita,

If I were a real builder and building houses for resale, I assume that I could deduct the costs of the house in the year that I spent the money (assuming I'm using cash accounting) against ordinary income. I would ignore basis rules and take the sale of the house as income in the year I sold the house.

If I'm right, real builders can use the deduction earlier. Any ideas?

Peter


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By Kevin in West Chester, OH on 1/11/2005


You would have to do the research to confirm, but I believe there is a new law for itemized deductions that will allow you to deduct sales tax paid instead of state and local income tax paid... if it is higher. If you paid a lot of sales taxes on building materials, as well as other purchases, this may be an option and might save some money. I currently plan to build next year, and will keep receipts for everything this year and do a comparison at year end. Of course, it may end up my state and local taxes are more than sales tax... but, it is an interesting option.
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By Paulita in Aptos, CA on 1/11/2005


In IRS Publication 600 it states:

"You can now elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). You cannot deduct both. Generally, to figure your state and local general sales tax deduction, you can use either your actual expenses or the Optional State Sales Tax Tables contained in this publication.


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By Peter in Gilford, NH on 1/11/2005


Just my luck... NH doesn't have sales tax.

If you build for profit under as a business, you would deduct sales tax under your Schedule C and still take the state tax under Schedule A. You would get both.


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By Paulita in Aptos, CA on 1/11/2005


The sales tax paid as an independent contractor cannot be deducted under Sched. A (itemized deductions) and in any case cannot be deducted twice. No double dipping!
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By Peter in Gilford, NH on 5/26/2005


Paulita,

I think you might have misread my post (notice the difference between sales tax and state tax). I noticed that you might have missed the nuance since you responded with a discussion about sales tax under Sched. A. (which I didn't say). I should have made the "state" taxes clearer to cover state/county/local income taxes.

Any business owner who sells retail products to the public "double dips". The retailer gets to deduct the sales taxes they pay for products they sell to the public as part of their business. In addition, any state/county/local income taxes/fees paid would be also be deductible.

So a real builder must be able to do the same. They must be able to deduct the sales tax they pay for materials they purchase to build the house (on their Schedule C or separate corporate return) and also deduct any state/county/local income taxes/fees on their Schedule A.

The election to choose to deduct sales taxes vs. state income taxes is allowing you to choose to deduct sales tax that was not otherwise previously deductible (such as an individual who doesn't own a business or a business owner who pays sales tax for item's unrelated to the business). 

The sales tax you paid as part of your business are always deductible if the item you purchased was deductible.

My two cents' worth...

Peter


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By Lori in Reno, NV on 6/13/2006


Paulita,

I think you have explained this well in your post. What the IRS website states is --> Remember that the deduction for state and local sales tax is available only if you itemize deductions on Form 1040, Schedule A. Check the box on line 5 of Schedule A to designate whether you choose to deduct state and local sales tax OR state and local income tax on your federal taxes. You cannot deduct both.

We tried to see if we could do this for our last year's federal taxes, but had not spent enough that year on sales tax. We'll see what will happen next year. We don't have a state tax in Nevada only sales tax. Thank you, Paulita for contributing to this forum.

Another post referred to retailers paying tax. When a retailer, e.g. Home Depot, buys supplies from the wholesalers they do not pay state sales tax, that sales tax is paid by the consumer and collected by HD. When a contractor buys supplies they can give their sales tax ID number and also not pay tax, but that tax is passed on to you and I the users of the actual product when it is used for our job.

Lori


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