@TPope1 wrote:
My wife and I purchased two lake lots in 2007 for $34,500. We financed them and paid them off in 2017. We can sell them in 2020 for $97,500. Our AGI will be about $84,000 in 2020. Question 1: can we use the interest paid on the loan to add to the cost basis for calculating the LTCG? Question 2: We improved the lots with a cabin and fishing pier. We spent money, but also did much of the work ourselves. Is there a way to use this "sweat equity" in calculating the cost basis, used to subtract from our gross profit?
1. You could have capitalized the interest (added it to the cost basis) if this land was bought for investment reasons and not personal use, but that would have required attaching a written statement to each tax return from 2007 to 2017 to report the capitalized interest. It's too late now. If this was personal property, you could have deducted mortgage interest on your main home and one second home, such as a vacation home, as an itemized deduction on your personal tax return. Again, if you did not do that, it's too late now.
2. You can never deduct or take an adjustment for the value of your own labor, only costs you actually pay for. (The 30,000 foot view is that, if you were allowed to deduct your sweat labor as a cost or add it to your cost basis, you would also have to report it as taxable income, and the income taxes would negate or be more than the capital gains tax you are trying to save.)
