topic INTEREST EXPENSE in Deductions & credits

INTEREST EXPENSE

brucehoppel251 — Tue, 23 Feb 2021 21:16:24 GMT

I flipped a house that sold in 2020 as an investment property. Do I include the interest paid on borrowed money as part of the "cost basis" for the house? Or do I deduct it as investment interest Expense?

Re: INTEREST EXPENSE

KrisD15 — Tue, 23 Feb 2021 21:31:09 GMT

No, mortgage interest CANNOT be added to the basis.

It would be deducted as a business expense.

(There are no deductible "investment" expenses)

Your house flipping should be reported as a business, thereby allowing you to expense material, labor, and the interest.

Re: INTEREST EXPENSE

brucehoppel251 — Fri, 26 Feb 2021 17:27:39 GMT

Kris,

I held this property for over 1 year and since it is my only flip I thought I would benefit from LT Capital Gains treatment as an investment. Wouldn't the cost of rehabilitation, materials and sub-contractor labor plus closing, attorney fees and realtor fees all go into the cost basis for the resale?

Filing as a business would subject me to regular income tax and self employment tax, correct?

What am I missing?

Thanks

Re: INTEREST EXPENSE

AmyC — Sat, 27 Feb 2021 00:18:07 GMT

A business with income would trigger the SE tax. This is not a business in your opinion, it was just a flip. The IRS may disagree with you. See Earning side income: Is it a hobby or a business?

Here are the options if not a business:

Mortgage interest is deductible on Sch A for your main home and a second home. If used as a second home.
Mortgage interest is deductible as interest paid on a business return.
Investment interest, see What Are Deductible Investment Interest Expenses

The property was held over a year, long term gain.

As for the basis, the cost to purchase plus improvements plus cost of sale all add together.

The IRS does not allow a deduction for mortgage interest paid in the basis.