What can be included in cost basis?

[akroper]

I recently sold a house that I built out-of-pocket, in my spare time.   I did 100% of the work myself, with some help from my sons.  Because of some serious health issues, the construction took several years.  The house was never occupied or rented out.  I need some guidance on what can be included in the cost basis.  I know I can include costs of materials and equipment rental, but not the value of my time and labor.  What about costs for electricity and heating oil during construction?  Local property taxes?  Debris and waste disposal fees?  Cleaning supplies in preparation for selling?  Tools needed for construction?  Gravel, topsoil, and landscaping material like plants and grass seed?  I have receipts for many tens of thousands of dollars, and now I need to sort out what can and can't be included in the cost basis.  Thanks for any information you can provide.

[NCperson]

here is what the IRS states: 

If you built all or part of your house yourself, its basis is
the total amount it cost you to complete it. Don’t include in
the cost of the house:
• The value of your own labor, or
• The value of any other labor for which you didn’t pay.

What about costs for electricity and heating oil during construction?  cost basis

Local property taxes?  no. Schedule A only.

Debris and waste disposal fees? cost  basis 

Cleaning supplies in preparation for selling?  selling costs

Tools needed for construction?  debateable.  are these tools your rented solely for the purpose of building. then cost basis.  but if you bought tools that are still in your posession post construction, then I'd suggest, no.

Gravel, topsoil, and landscaping material like plants and grass seed? cost basis. 

[Opus 17]

For real property, you cost basis is anything that improves the real property (land and permanently attached structures).  So that includes the cost of landscaping, adding a paved driveway, and so on.

Allowable adjustments to basis are listed in publication 523.

https://www.irs.gov/forms-pubs/about-publication-523

Tools would never be includable in the basis of the property.  If they are personal tools, that's a personal expense.  If you were in business of building houses, they would be assets of your business and would be a depreciable expense against your income.

You didn't mention inspections and permits, you can can include those costs.

I'm not sure about utilities.  If this was always intended to be an investment, there is a way to capitalize (add to cost basis) your carrying costs (property taxes, hazard insurance, utilities) but that was placed on shaky ground by the 2017 tax reform law, and in any case, would have required attaching written statements to each tax return when you had costs to capitalize.  So it would require filing amended returns and, as I said, the procedure is probably no longer allowed.  Without the ability to capitalize expenses, you can deduct property taxes as a schedule A itemized deduction (subject to the $10,000 SALT cap), but hazard insurance is not deductible or a cost basis adjustment, and I think the utilities probably go away, too.  (For example, if there were days or weeks the property was empty and not being worked on, due to the health issues you mentioned, those utilities are not being applied to property improvements--at best, they are maintenance expenses keeping the property as-is so it doesn't deteriorate, but that's not allocable to the cost basis.)

[NCperson]

@Opus 17 - what I was thinking on the utilties was the power required to build the house; many tools require electricity to run them - and that electric expense is a cost of building the house.  utility costs to maintain the structure - I agree - cannot be capitalized.

Why would tools "never" be included?  Many tools can be rented these days.  I would agree that personally owned tools are never included. 

[Opus 17]

@NCperson 

I meant owned tools.  Rentals would be ok, I think.  

How would you allocate the cost of utilities to build the house separate from costs to maintain the home?

[NCperson]

<<How would you allocate the cost of utilities to build the house separate from costs to maintain the home?>>

the OP would have to come up with an allocation that would be defensible in an audit.  For example, until the AC units (or heating units, depending on where in the country this OP is) were installed and operational, and the home was enclosed, it could be quite defensible that 100% of the power costs were related to building out the house...after that I agree it gets 'squishier'.  Once the certificate of occupancy was issued, then it would be hard to defend anything other than 'zero'.