MTW wrote:
- quote -

This was a matter of local policy in dealing with these
audits. We had a whole bunch of them in the late 1980's.
It was a way of classifying the taxpayer's intent. There
will be no IRC section, TR, TAM, or even a simple internal
memo. About once every 6 weeks, we would have an audit group
meeting (or multi-group meeting - as there were multiple
groups at my location) where we may discuss certain trends
and audit projects that were going on. The policy came from
one of those.

California has always been a "different creature" when it
comes to its real-estate market.

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D. Stussy wrote:

- quote -

Can you cite a code section that specifically supports that
result? Or was this simply an informal "tolerance policy?"

MTW

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dc wrote:
- quote -

Actually, it could still be an investment property. What it
now hinges on is the FREQUENCY that you turn over properties
and how many you have simultaneously. A serially-sequential
chain (i.e. one at a time) could still be "investment" but
simultaneously-owned are not.

During my IRS days, my audit group had a few of these. We
were told to let 1 or 2 properties at a time be investments
while 3 or more simultaneous ones became inventory. The
most I ever saw were 18 turned over in a year, with 15 being
the highest, simultaneous count (and yes, that taxpayer did
use Schedule C for this activity).

- quote -

This is going to be a "facts and circumstances" issue. I
disagree with Mr. Wing as noted above.

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dc wrote:

- quote -

Assets that are "held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business"
are EXCLUDED from the definition of "capital assets" in IRC
1221. Therefore, they produce "ordinary" income on sale.

In simpler terms, you are becoming a "builder" or
"developer," and such activities are NOT considered to be
"investing" for tax purposes.

I agree that you should seek professional advice regarding
the structure of your activities.

MTW

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I hope that "capitalizing" expenses is something you can do
yourself. Here's how:

1. Write "My basis in that investment property" at the top
of a piece of paper.
2. Write what you paid for the thing.
3. Under that, write the amounts of the expenses you want
to "capitalize" (everything except taxes).
4. Draw a line under the numbers.
5. Add the amounts.

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MTW <mtwingcpa[at]yahoo.com> wrote:
- quote -

Thanks for the note! Now, this is the first time I've heard
this.

It's sounding more and more like I need to see a
professional on this. The problem is, I've heard all sorts
of variations on how to treat this situation from those I've
consulted with over the phone. I was hoping to get a good
understanding of what needs to happen prior to actually
sitting down with someone.

So, what is it about my situation that doesn't put this in
an "investment" category but rather, in "ordinary income"?
I've only got the one house that's being renovated. I will
probably have held it for over a year by the time it sells.
And, there are improvements being done on the house.

Please, if someone can point me to a section in the Code or
to a publication, I'd greatly appreciate it.

Thanks, again,
dc

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dc wrote:

- quote -

Since your stated intent is to "renovate and resell," this
is neither a "second home" NOR an "investment property."
Rather, it is an "ordinary income" property held for sale in
the ordinary course of business.

MTW

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Harlan Lunsford <hlunsford[at]bellsouth.net> wrote:
- quote -

Thank you all for your input! Yes, I would agree that it
should probably be classified as an investment property if
my intent is taken into account. However, Pub 936 has a
description for a "second home not rented out" that seems
to fit - the house has neither been offered for rent nor
sale in the past year. There's no mention of distance or
intent. This is from memory since I don't have the
publication in front of me.

Since I will probably be classifying it as an investment,
what is the process/form that I need to "capitalize"
things like mortgage interest and property taxes? Why
wouldn't I "capitalize" taxes? Do I need to do anything
for the IRS with the amounts I've spent improving the
house? Do I need to do anything for the IRS with the
amounts I've spent just to "carry" the property, i.e.,
insurance, utilities, etc.? Is "capitalizing" expenses
and such something I can do myself, or do I need a
professional to do this for me?

Thank you all, again for the inputs. Oh, and to answer
a question that was asked, if I could move into the house
and live there for 2 years, that would be great, but alas,
it's not big enough for us!

dc

Moderator:
Do not capitalize property taxes because they only
deductible in the year paid!

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dc wrote:

- quote -

intend to) means that it is not a residence - and therefore
the "second or other home" rules do not apply to it. It's
an investment - or if you were to do this regularly and with
multiple properties in process simultaneously, inventory.

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dc wrote:

- quote -

it just isn't a second home. Doesn't qualify by any stretch
of the imagination, hence no deduction for mortgage
interest; taxes yes.

So you're left with it being investment property and best to
capitalize all costs (except taxes of course).

ChEAr$,
Harlan Lunsford, EA n LA

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me[at]right.here.com (dc) wrote:

- quote -

Based on your summary, this is clearly an investment
property. Therefore, your initial cost, plus all "carrying"
costs and improvement expenses should be incorporated into
your cost basis when you sell it. (If you want to define
that as "capitalizing," go ahead -- but CPA's doubtless have
another definition.)

In order to qualify as a second home and be treated
according to your earlier definition, you should a) have an
intention to use the home for your own pleasure as either a
vacation getaway site, or b) plan it as a second residence
for some purpose which makes sense to your family, for
whatever reason.

"Running the numbers" can be done, but it really doesn't
seem kosher, when it comes to the tax definition, because
your intention is the key issue. Usually, to qualify as a
Vacation Home, for example, you have to personally use it
for a minimum of 14 days or 10% of the total days in use --
though this is usually applied for a property which you rent
part of the time.

I have never heard of a second - or vacation - home in the
same area -- although I know San Francisco Bay Area has
dramatically different climates within the metro area, and
one might make a case for wanting the "sunshine" available
in the East Bay to escape fog-bound sections of West San
Francisco. And I frankly don't know whether there is a
mileage requirement for qualification as a vacation home.

But your own summary of intent seems to define your
situation as an _investment_, and therefore it should be
treated as a separate entity, with costs separated and
reported as a part of the basis when you eventually sell it.

I'll be interested to see the Professional views on this
subject.

Bill

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dc wrote:

- quote -

pub defines a main and second home.

Ric Smith, EA
Dunlap TN

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This is a followup question from an earlier post. I'll
summarize my situation really quickly:

- Purchased another home in the same town as my primary
residence for the purposes of renovating and reselling.

- Plan to sell it after a year's time of ownership.

- Proceeds from an equity loan on primary residence paid for
the other house.

- The other house has neither been offered for sale or rent
during the period of ownership. It has been unoccupied
during this period.

- Current filing status is as an individual (i.e., not a
business or other entity).

Anyway, from some discussions, there seems to be two camps
on how this should be handled. 1) This is a "second home"
and I can deduct interest and taxes on Schedule A. Capital
improvements to be added to the basis. And 2) This is an
investment. An election shoud be made to capitalize
interest, taxes and other expenses. All capitalized
expenses are added to the basis.

So, any opinions on where my situation falls? Second home?
Investment property? If it's an investment property, how do
I "capitalize expenses"? Is that something only a CPA would
do?

Hopefully someone will have some foresight/experience with
something like this, otherwise I may just have to run the
numbers for both cases and see which one looks better.
<shrug?
Thanks,
dc

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