I purchased a home to rehab and make a profit. I have't sold it as yet so there is no income. I need to know do I do a schedule E or file as a self employed business? Are the expenses such as the paint, trim, lighting, plumbing, fixtures, appliances, etc. all added to the cost basis or can I deduct as supplies. It would seem that something has to be supplies to be deducted. I did all that work myself. I did pay a subcontractor to do the siding and windows. Whats the benefit of doing a self employed business over a schedule E or visa versa?
Schedule E is only if you rent it. If you buy and sell houses frequently then it is a business, and you don't get the 250K/500K exclusion. If you lived in the house for 2 of the last 5 years then you do get the 250K/500K exclusion so long as the IRS does not consider is a business, and you would just use Schedule D.
Only improvements add to the cost basis of the house. Repairs (such as painting and fixing the plumbing) do not add to the cost basis. I'm not sure with "trim" is, but it sounds like an improvement. I would say that adding new lighting is an improvement. On the sale of a personal residence, you get the 250K/500K exclusion mentioned above as long as you meet the holding requirements, but you don't get to deduct repairs. Since 250K is so much of money, it's quite possible that improvements add to the cost basis of the house (and thereby decrease your profits when you sell the house), but the profit is probably still well under 250K.
If you are running a business that fixes up homes and sells them, you would probably use Schedule C. You would be able to deduct repairs as expenses. But I don't know what tax rate you would use when you sell the house -- thought it could be ordinary income.
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