# New contractor with tax question regarding deductions on a personal residence.



## trkr81 (Feb 1, 2015)

I realize this is best suited for a CPA (and I'm currently shopping for one). In the meantime,... I'm a newly licensed contractor and plan to build my own home next year. Obviously, I'd like to take advantage of my trade by deducting material costs, labor, etc.

Is it legal for me to do that on my own home? And if not, let's try another angle: Suppose that I built a home "to sell" but it "doesn't sell". Clearly, during the building process, I deducted the material and labor expenses from my tax liability. And since the house never sold, we decide to move into it.

Clearly, if I only grossed say $500,000 that year, and spent $300,000 building that home, my taxable income is for the remaining $200,000. But if the home does not sell, and we move into it, does that affect my taxable income? Because, in essence, "what was" a business expense, is no longer a business expense and thus raising my taxable earnings.

Any help on this would be helpful, thank you.


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## Mr Latone (Jan 8, 2011)

Putting a post in the introductions would be appropriate.

Meanwhile......

There is a lot wrong with your formula.

Without offering tax advice and without being specific, here are a couple points to consider.


Materials and labor _may_ be business expenses, however, the completed building is an asset. If it's not sold it is inventory.

Round about you can't just write off the $300K. There is a lot more to it.

If you contribute your own labor to an otherwise deductible improvement, that labor will not be deductible.

There may be differences in how things are treated based on you business entity.

For building a house and looking for tax savings, the best deal out there is the $250K exclusion for gains on sale of primary residence lived in 2 out of 5 years. You can do this every 2 years.

The tax code is complicated, but if you google specific words that you know are relevant to a topic you re interested in, there are a lot of bulletins and pdf documents from the government online that offer answers.

A short session with a CPA who specializes in construction would likely set you on the right path in short order


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## pcplumber (Oct 12, 2008)

trkr81 said:


> I realize this is best suited for a CPA (and I'm currently shopping for one). In the meantime,... I'm a newly licensed contractor and plan to build my own home next year. Obviously, I'd like to take advantage of my trade by deducting material costs, labor, etc.
> 
> Is it legal for me to do that on my own home? And if not, let's try another angle: Suppose that I built a home "to sell" but it "doesn't sell". Clearly, during the building process, I deducted the material and labor expenses from my tax liability. And since the house never sold, we decide to move into it.
> 
> ...


Using my dumb streetcorner advice I would say there is absolutely no way you can build a home and write off the materials because it is your house that you are building and any materials your purchase for your personal use with your business money is a Capital Gain. It would be using your company's money that you was supposed to pay income tax on to build your personal house. You have to pay your business tax first. But, when you sell your home you can deduct the cost to build the home and reduce your Capital Gains tax.

For example, if your business earns $100k and you purchase a brand new vehicle for $50k you spend your business profit for the van, but at the end of the year that vehicle is a Capital Gain.

Obviously, if you sold the house you could take the selling cost, deduct your materials and expenses and the rest would be profit.

I am fairly positive that if you own a construction company that earns a profit you will have to pay tax on that profit first, use what is left to purchase the materials to build a house and pay tax a 2nd time for the profit on the house. Otherwise, I could take the profit from my plumbing company, not pay tax on my plumbing profit, build a house and pay only one profit with what is left. In essence, I could bring my profit down to zero. It ain't going to happen.

From my experiences, you cannot combine a bunch of separate businesses into one business to avoid paying the separate tax for each business. I would love to combine my plumbing company and all my rental property purchases, sales, profits and losses into one company, but it is not possible. I think combining real estate deals together is limited to licensed management companies that make their profit by managing multiple properties for clients and not for their personal portfolio.


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## TNTRenovate (Aug 19, 2010)

Your company would have to buy the land and build the house. You would then sell the house to yourself. That's about the only way to write it off.

EDIT: your company would only have to be contacted to build the house.


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## pcplumber (Oct 12, 2008)

TNTSERVICES said:


> Your company would have to buy the land and build the house. You would then sell the house to yourself. That's about the only way to write it off.
> 
> EDIT: your company would only have to be contacted to build the house.


If his company buys the land then his company would have a Capital Gains tax to pay. Somewhere, someone is going to have to show where the money came from to purchase the land. If the company purchased the land then the company had to earn the money to get the land and those earnings are taxable as a Capital Gains, or someone had to loan the company the money in which case the company would have to show where the money was paid back. 

Suppose my company builds a house and the lot cost $100,000. First, my company has to earn about $125,000. I pay $25,000 for taxes on that $125,000 and my company has $100,000 left to buy the lot. Then, my company can build the house and my company does not have to pay tax on the lot if I sell the lot for exactly $100,000, but my company will have to pay tax on any Capital Gains on the sale of house based on the total sale price minus the cost of materials, lot, labor etc., but if his company sells the house for a price far below the market value there could be a problem and it can bite him in the butt, anyway, when he goes to sell the house. Suppose, he cheats and sells the house to himself for $50,000 when it is worth $300,000. When he sells the house he will be hit for s $250,000 Capital Gains tax plus the increase in market value to something like $400,000. Instead of paying Capital Gains tax based on $100,000 he will have to pay Capital Gains tax based on $350,000 unless he sells the house within the period where an exemption is allowed.

A company CANNOT earn $100,000, purchase a lot for $100,000, sell the lot for $100,000 and avoid Capital Gains tax. Somewhere, someone has to pay Capital Gains tax for the money that was earned to purchase the lot, or the books had better show that the money was a loan and the money was paid back, or the money is still on the books as a company debt, but even if the money is a debt that is not paid back it will eventually be pegged as Capital Gains if the debt is not paid back.

Otherwise, my plumbing company would never have to pay one penny of tax for the profit my company earns. All I would have to do is purchase lots with my plumbing profit, sell the lots later for the same price and avoid all income taxes.


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## TNTRenovate (Aug 19, 2010)

pcplumber said:


> If his company buys the land then his company would have a Capital Gains tax to pay. Somewhere, someone is going to have to show where the money came from to purchase the land. If the company purchased the land then the company had to earn the money to get the land and those earnings are taxable as a Capital Gains, or someone had to loan the company the money in which case the company would have to show where the money was paid back.
> 
> Suppose my company builds a house and the lot cost $100,000. First, my company has to earn about $125,000. I pay $25,000 for taxes on that $125,000 and my company has $100,000 left to buy the lot. Then, my company can build the house and my company does not have to pay tax on the lot if I sell the lot for exactly $100,000, but my company will have to pay tax on any Capital Gains on the sale of house based on the total sale price minus the cost of materials, lot, labor etc., but if his company sells the house for a price far below the market value there could be a problem and it can bite him in the butt, anyway, when he goes to sell the house. Suppose, he cheats and sells the house to himself for $50,000 when it is worth $300,000. When he sells the house he will be hit for s $250,000 Capital Gains tax plus the increase in market value to something like $400,000. Instead of paying Capital Gains tax based on $100,000 he will have to pay Capital Gains tax based on $350,000 unless he sells the house within the period where an exemption is allowed.


Only if they profited off it and then didn't reinvest the profit in another property.

The earnings that the company used would only be taxable as capital gains if they were earned with a capital investment. Not all income is capital gains. That's why there is an income tax and a capital gains tax.

You seriously have an issue with understanding the difference between capital gains and income. I bet you still believe that selling materials for a job is capital gains.


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## Chopsaw Chick (May 6, 2011)

You need professional help (an accountant) because your plan is seriously flawed and could result in an audit, fines and even jail time. Labeling personal expenses - like costs associated with building your own home - as a business expense will get you visited by the IRS really fast. It's no different that calling your grocery bill a business expense. The money that you spend on groceries is not an expense of operating a construction company and neither are the costs you incur building or remodeling your own home. The IRS is very suspicious of contractors who have a lot of expenses and very little revenue. It would be a huge red flag. 

I believe you can, however, use money from your business account to build a home and then essentially "sell" it to yourself. This would be an option to discuss with your accountant. But I'm sure the IRS will get their share - and probably more - of the fruits of your labor. As previous members mentioned, you would probably be better off to simply document your actual expenses (not including your labor) so that if you do decide to sell soon, you can accurately compute your capital gains/loss.


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## pcplumber (Oct 12, 2008)

TNTSERVICES said:


> Only if they profited off it and then didn't reinvest the profit in another property.
> 
> The earnings that the company used would only be taxable as capital gains if they were earned with a capital investment. Not all income is capital gains. That's why there is an income tax and a capital gains tax.
> 
> You seriously have an issue with understanding the difference between capital gains and income. I bet you still believe that selling materials for a job is capital gains.


I posted three links recently and all three links state that Capital Gains includes profits from a car, a couch, boat and every type of personal property. I re-read my recent posts to make sure that I did not call business income a Capital Gains and maybe I even did by mistake, but I did not see it.

I will re-write what I said.

A) If a business earns $100,000 and pays $50,000 of that profit for a brand new truck then the business now has a Capital Gain of $50,000 because even though it paid the $50,000 from the company's profit for the truck it now owns the truck that is worth $50,000. So, since the company owns the $50,000 truck the company cannot write off that $50,000. The company will have to pay tax on the $50,000 profit the company profited and pay a Capital Gains tax on the truck based on $50,000. I don't know exactly how my CPA does the books for Capital Gains because I have not purchased an item that was considered a Capital Gain for many years, but I am 100% positive that the truck is subject to a Capital Gains tax and that is why people lease vs. purchase because when you lease 100% of the lease payment is an expense that can be written off and there is no Capital Gain because you are not the owner of the truck. 

I think (not positive) that when a lease ends and you do a buy-out for the vehicle you can have some serious Capital Gains problems. For example, you make payments for the lease for 48 months and at the end of the lease you purchase the vehicle for $9,000. If the vehicle has a Blue Book value of $20,000 you have to pay a Capital Gains tax. If your Capital Gains tax is 15% then you will pay another $3,000 for that vehicle plus registration fees and sales tax. In California, I think the sales tax is often (not always) based on the Blue Book value and that adds a few thousand more.

B) I said that if the business earns $100,000 and purchases a lot worth $100,000 then the company still owes tax based on $100,000 because that lot is a Capital Gain. The business cannot earn $100,000, purchase a lot and tell the IRS that the business did not earn a profit. The business did earn a profit and them it purchased a lot that is a Capital Gain. If a Business could use its profit to purchase property without paying taxes I would use all my plumbing profit, purchase real estate and my company would never pay tax for the profits the company makes.

It is not hard to figure out and you are arguing just for the sake of arguing.

You cannot purchase a truck with your company's money and call the truck a profit. The truck is a Capital Gain and the rest of the company's money is a profit.

All money you earn from your business is income and/or profit. A bank will ask you what your income was for the past three years and you answer with the gross amount that includes all income. When you answer to a bank you do not give separate totals for what you earned from income and Capital Gains. If the bank wants to know your the separate totals for your income and Capital Gains they will get that when they review your tax records. You always combine the two together. When you report your income and profit to the IRS you separate business income and/or profit and you separate Capital Gains and the end results is your NET ANNUAL INCOME.

Yes, you can use your business money to purchase a lot for personal use, but you had better pay the tax based on the profit the business earned, first. Otherwise, you will be committing embezzlement. You cannot steal money from your company and avoid paying taxes on the profit your company earned. 

I am guessing, but I would assume that you have consider that you have two entirely separate entities and each entity would have its separate tax consequences. One entity is your contracting company and your company is responsible to pay taxes for the profit it earns. The other entity is your personal real estate investment and you pay taxes on your Capital Gains (it is still a profit). If you use your company's money to build a home, or for any other purposes the way I do my taxes is; all the money I use from my company for personal purposes is considered a PERSONAL WITHDRAWAL. For example, if I use a company check to purchase $5,250.29 for lumber my tax records will show that that the check written to the supply house was a PERSONAL WITHDRAWAL. At the end of the year I may have $150k on my records for Personal Withdrawals and I pay my income tax based on that amount. So, if you are using your company's to purchase lumber for your home amd you don't claim those transactions as Personal Withdrawals then you are embezzling money from your company and you are committing tax fraud. I am not positive if both are Federal offenses.

The argument regarding this subject is really stupid (if that is the correct word to use). That is like saying I want to use my company's money to purchase a $100,000 Lexus, sell the Lexus to myself later and avoid paying taxes on the company's money that was used to purchase the Lexus. 

Maybe my company will earn $1 millions this year. I think I have my company purchase a $1 million yacht, buy the yacht from my company for $1.29 and nobody will have to pay a penny for tax for the $1 million profit my company earned.

Earning a profit for selling materials generates a Capital Gains. I posted links to 3 websites last week confirming this and here are two more links. The 2nd link states that even selling a couch is a Capital Gains. This makes myself to be correct regarding the last 5 arguments. I'm wondering how you can argue with the information in the IRS website and 4 others.

http://www.irs.gov/uac/Ten-Important-Facts-About-Capital-Gains-and-Losses

Ten Important Facts About Capital Gains and Losses

IRS Tax Tip 2011-35, February 18, 2011

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When a capital asset is sold, the difference between the amount you paid for the asset and the amount you sold it for is a capital gain or capital loss.

Here are ten facts from the IRS about gains and losses and how they can affect your Federal income tax return.

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

http://www.irs.gov/taxtopics/tc409.html

Topic 409 - Capital Gains and Losses

Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the basis in the asset and the amount you sell it for is a capital gain or a capital loss. Generally, an asset's basis is its cost to the owner, but if you received the asset as a gift or inheritance, refer to Topic 703 for information about your basis. You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible.


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## TNTRenovate (Aug 19, 2010)

pcplumber said:


> I posted three links recently and all three links state that Capital Gains includes profits from a car, a couch, boat and every type of personal property. I re-read my recent posts to make sure that I did not call business income a Capital Gains and maybe I even did by mistake, but I did not see it.
> 
> I will re-write what I said.
> 
> ...


I never suggested that you would not have to pay taxes on anything. You are right, arguing with you is stupid, or at least making me stupid.

Later player!


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## TNTRenovate (Aug 19, 2010)

PC, do you ever post in the plumbing section? I looked back the past 6 months on your posts and none were on the plumbing threads. Just curious why you don't contribute to the plumbing section?


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## Calidecks (Nov 19, 2011)

TNTSERVICES said:


> PC, do you ever post in the plumbing section? I looked back the past 6 months on your posts and none were on the plumbing threads. Just curious why you don't contribute to the plumbing section?


There's only so many hours in a day Rob, get off him! :laughing:


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## AllanE (Apr 25, 2010)

pcplumber said:


> If a business earns $100,000 and pays $50,000 of that profit for a brand new truck then the business now has a Capital Gain of $50,000 because even though it paid the $50,000 from the company's profit for the truck it now owns the truck that is worth $50,000. So, since the company owns the $50,000 truck the company cannot write off that $50,000. The company will have to pay tax on the $50,000 profit the company profited and pay a Capital Gains tax on the truck based on $50,000.


There is so much wrong in your long post, I only have time to address part of it. If a business earns 100k and buys a truck for 50k, the truck is not a Capital Gain, it is a Capital Asset. You would still owe tax on the 100k, a portion of the truck could be expensed against the 100k. There would be no Capital Gain Tax unless the truck was sold for an amount greater than 50k, which of course would most likely not happen. 

PC, you really need to lean what a Capital Asset & Capital Gain is before you give out advice.


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## pcplumber (Oct 12, 2008)

AllanE said:


> There is so much wrong in your long post, I only have time to address part of it. If a business earns 100k and buys a truck for 50k, the truck is not a Capital Gain, it is a Capital Asset. You would still owe tax on the 100k, a portion of the truck could be expensed against the 100k. There would be no Capital Gain Tax unless the truck was sold for an amount greater than 50k, which of course would most likely not happen.
> 
> PC, you really need to lean what a Capital Asset & Capital Gain is before you give out advice.


The information from the two links state that Capital Assets lead to a Capital Gain. A boat is a Capital Asset. The profit when selling a boat is a Capital Gain.

To be politically correct, when a company pays cash for a truck with the company's profit the truck is a Capital Asset, part of the company's profit, a Capital Gains in the sense that if you sold the vehicle and all in one. It is all the same. The tax consequences are the same regardless of what you call the vehicle. You cannot purchase the truck with the company's profit to avoid paying taxes on that portion of the company's profit. Not everyone uses the same dictionary definitions.


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## pcplumber (Oct 12, 2008)

TNTSERVICES said:


> PC, do you ever post in the plumbing section? I looked back the past 6 months on your posts and none were on the plumbing threads. Just curious why you don't contribute to the plumbing section?


Plumbers are too smart for me and I have much more fun with you.

When I started with CT most of my posts were in the marketing and sales section and I started finding many plumbers were using my ideas in the Los Angeles area. I started to believe that I was cooking my golden goose and I think I really did.


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## TNTRenovate (Aug 19, 2010)

pcplumber said:


> The information from the two links state that Capital Assets lead to a Capital Gain. A boat is a Capital Asset. The profit when selling a boat is a Capital Gain.
> 
> To be politically correct, when a company pays cash for a truck with the company's profit the truck is a Capital Asset, part of the company's profit, a Capital Gains in the sense that if you sold the vehicle and all in one. It is all the same. The tax consequences are the same regardless of what you call the vehicle. You cannot purchase the truck with the company's profit to avoid paying taxes on that portion of the company's profit. Not everyone uses the same dictionary definitions.


Actually that's exactly what you can do. Go to a dealership in December. You find a very low selection of white vans because companies are unloading profits to avoid paying taxes on them. A capital asset is not taxable unless sold. And buying it with capital gains does not make it a capital assest. It's a capital assest regardless of the income source.


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## AllanE (Apr 25, 2010)

pcplumber said:


> You cannot purchase the truck with the company's profit to avoid paying taxes on that portion of the company's profit.


Of course you can. In fact sound tax advice is to purchase NEEDED equipment to reduce taxes, since that equipment (truck) can be written off as a business expense or depreciated, thus reducing your taxable income.


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## rrk (Apr 22, 2012)

Allan, It is nice to see you on this site. I enjoy viewing your photos on your website, the small details in your homes are really interesting for me.


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## pcplumber (Oct 12, 2008)

AllanE said:


> Of course you can. In fact sound tax advice is to purchase NEEDED equipment to reduce taxes, since that equipment (truck) can be written off as a business expense or depreciated, thus reducing your taxable income.


Everyone is wrong! I am right!

I deleted the post, will do some research, more thinking and re-post tomorrow.


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## Calidecks (Nov 19, 2011)

pcplumber said:


> Everyone is wrong! I am right!
> 
> I may not always use the correct words nor definitions, but give all people a test and virtually nobody gets 100% correct all the time.
> 
> ...


But purchasing a truck wouldn't be with profit, profit is what's left over after expenses. Buying a work truck certainly is an expense.


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## TNTRenovate (Aug 19, 2010)

Californiadecks said:


> But purchasing a truck wouldn't be with profit, profit is what's left over after expenses. Buying a truck certainly is an expense.


What you didn't need thirty paragraphs of useless bs information to say that?


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