Expert: Dick Dennis - 2/26/2007

Question
I recently retired from teaching and bought a foreclosed home for our 2 sons to live in and fix up.  Since my husband and I already own a home, I had to purchase the home as an investment property.  Our boys are in college and are getting a degree in construction management. What expenses am I allowed to deduct?  Can I pay them a salary for doing the work on the home.  It needs new flooring throughout, new kitchen cabinets, some plumbing work, and they are going to add a half bath, bedroom and family room on the lower level.  The deed has my oldest son and my name on it.

Answer
I suspect of who you really need to ask this question is your favorite tax expert, Karen. If you are concerned about funding your sons, you are allowed to five them $12,000 each tax free. As an investment property, your basis is what you paid for it plus most of your closing costs, plus the costs of rehabbing the property. It doesn't matter who does the work. If you want to pay your sons for doing the work, there is nothing that says you cannot. It would merely be considered as part of the rehabbing.

Example: Paid $100,000 for property. Paid $40,000 to rehab it. Basis is $140,000. Upon sale, anything above that figure would be considered capital gain. So, you should consult with your tax expert to make sure you are taking the correct steps is starting your sons on their investment careers. You could forgo any tax, for now, by trading the property in a 1031 tax-deferred exchange. You could continue to grow your real estate net worth by continually trading up without having to pay any tax. But only if traded up. Your tax expert can explain it all to you. I do wish you well.

Dick Dennis