House Flip Tax Question: Can utilities, loan interest be deducted or added to basis for one-off Schedule D flip?

Thanks for the detailed response. So if I understand correctly, I should track all these expenses separately (loan interest, utilities, etc.) so I can properly categorize them at tax time? And what about insurance on the property during renovation - is that handled the same way as the utilities?

Yes, definitely keep detailed records of all expenses categorized by type - this will make tax time much easier and help if you ever face questions about your basis calculation. Property insurance during renovation can also be capitalized as part of your basis since it's a carrying cost during the improvement period. Just like with the utilities and interest, the key is that these costs were incurred during the active renovation period before the property was ready for sale.

That sounds helpful. Does it actually tell you how to categorize things like loan interest and utilities specifically? Those seem to be in a gray area from what the expert said above.

I'm kinda skeptical of these tax tools. Did you still need to run everything by an accountant afterward? Or did you just rely on what the software told you?

It definitely handles the gray areas like loan interest and utilities - it asks you specific questions about when and why these expenses were incurred to determine if they qualify for basis treatment. For my flip, it properly categorized my construction period interest as part of my basis. I actually didn't need an accountant afterward. The tool creates a detailed report explaining each categorization decision with references to the relevant tax code, so I felt confident filing on my own. It's built by tax professionals who understand real estate transactions, not just general tax software.

Wait, I don't get it. How does this actually work? Does it just keep calling the IRS for you or something?

Yeah right. No way this actually works. The IRS is impossible to reach, and even if you do get through, they give terrible advice that they won't stand behind later.

It basically uses an automated system to continuously dial and navigate the IRS phone tree for you. When it finally reaches an agent, it calls your phone and connects you directly. Saves you from sitting on hold for hours. It definitely works! They use some kind of technology that monitors the IRS queue and keeps trying at optimal times. It's like having someone else wait on hold for you, but it's all automated. I was skeptical too until I tried it and was talking to an actual IRS agent in about 15 minutes.

What about realtor commissions when selling? Are those subtracted from the sale price or handled differently?

Realtor commissions when selling are subtracted from your sale proceeds, effectively reducing your gain. They're not added to basis but instead directly reduce the amount you're taxed on. For example, if you sell for $300,000 but pay $18,000 in commissions, your net proceeds for tax purposes would be $282,000. This is different from purchase costs like transfer taxes which get added to your original basis.

Staging costs are generally considered selling expenses rather than capital improvements. They don't permanently enhance the property's value but are more like marketing costs. These would reduce your amount realized from the sale (similar to realtor commissions) rather than being added to your basis.

This is really helpful advice about property taxes and documentation! I'm curious about the personal use allocation you mentioned - if I had to stay in the house for just a few nights while coordinating contractors, would that affect my entire renovation period? Or is it more about extended personal use? Also, did you find that having detailed photos actually helped during any IRS interactions, or is it more of a precautionary measure?

Great question about personal use! A few nights here and there for legitimate business purposes (coordinating contractors, meeting inspectors, etc.) generally won't disqualify your expenses from being capitalized. The IRS looks at the primary purpose - if you're staying there occasionally because it's necessary for the renovation work, that's different from using it as a personal residence. However, if you stayed there for weeks at a time or used it as your primary residence during any part of the renovation, then you'd need to allocate expenses between personal and business use for those periods. Regarding photos - I haven't personally been audited, but my CPA always recommends them as supporting documentation. They help establish that work was actually done and that expenses were legitimate improvements rather than just maintenance. Think of them as insurance - hopefully you'll never need them, but if you do get questioned, having clear before/after evidence of the improvements can save you a lot of headaches. The key is showing the IRS that this was a legitimate investment activity with the intent to improve and sell, not personal use disguised as a business expense.

This is super helpful about permits and the repair vs. improvement distinction! I'm just getting started with understanding all this tax stuff for flips. Quick question - what about things like dumpster rentals and debris removal during renovation? Those seem necessary for the improvement work but don't directly "improve" the property itself. Do those typically get added to basis or treated differently? Also, should I be tracking the time I spend doing work myself, or just the actual money spent on materials and contractors?

Great questions! Dumpster rentals and debris removal during renovation definitely get added to your basis - they're considered part of the cost of making the improvements, even though they don't directly add value. Think of them as necessary expenses to complete the capital improvements, similar to how you'd include demolition costs. Regarding your own labor - unfortunately, you can't add the value of your own time to your basis. The IRS doesn't allow you to pay yourself and deduct it. You can only include actual out-of-pocket expenses like materials you purchased and payments to contractors. However, don't forget about related costs when you do your own work - things like tool rentals, safety equipment you had to buy, and even mileage driving to pick up materials can be included. Keep track of all those smaller expenses because they add up! The key is documenting everything with receipts. Even small expenses like screws, paint brushes, and plastic sheeting count toward your basis if they were used for the improvements.

This spreadsheet approach is brilliant! I wish I had thought of this when I started my project. The digital receipt backup tip is especially valuable - I've already lost a couple receipts and had to scramble to get duplicates from suppliers. Quick question about the specialty tools - if I bought a tile saw for $200 but could potentially sell it afterward for maybe $100, do I still add the full $200 to my basis? Or should I only count the net cost? I'm trying to figure out if the potential resale value affects how I handle these tool purchases. Also, thanks for mentioning equipment purchases - I hadn't thought about including my pneumatic nailer and compressor that I bought specifically for this flip. Those definitely weren't cheap!