Tax consequences of selling a homebuilt.

On Thu, 07 Sep 2006 12:26:40 -0400, Ron Natalie
wrote:

Ernest Christley wrote:

My wife being a real-estate agent, I can confidently attest that it is a
lot more complicated than that. But this is the US tax code we speak
of, so you already knew that didn't you? There is a whole list of
exclusions, inclusions and dependancies based on when you bought the
house, and which way the wind is blowing when you get audited. You can
also have a vacation home fall under these rules.

It's complicated, but when you bought the house has NO bearing on it
(other than obviously that you must have bought it at least two years
earlier unless you get one of the special exceptions for "involuntary"
sale). The only other obvious mess is if you rolled the profit from the
sale of a house previously (under the old rules) into the current house.
All that does is change your basis. It doesn't change the capital
gains exclusion. The only other vagaries are how do you establish
that you were actually using the property for the primary residence
(especially if you have more than one property you are living in).


So bringing it back to the tax ramifications on a homebuilt. As we all
know, a homebuilt project is never done. If you're paying the capital
gains on the appreciation between when it was finished and when it was
sold, then I just completed it or a restoration (define restoration) the
week before I sold it.

It has nothing to do when it was finished. Your basis is your cost
outlay on it.

For the G-III I'm even keeping the sales slips for the steel I use to
build the construction fixtures. Paint, glue, resin, Tools used on
and worn out in the building process. I have a whole set of tools
just for the G-III. If they're still any good after finishing the
project I'll sell them and the difference will be their cost.

Unfortunately they won't let me deduct the shop even though it was
built specifically for the purpose of building the G-III.

Roger Halstead (K8RI & ARRL life member)
(N833R, S# CD-2 Worlds oldest Debonair)
www.rogerhalstead.com

Ron Natalie wrote:
Ernest Christley wrote:

My wife being a real-estate agent, I can confidently attest that it is
a lot more complicated than that. But this is the US tax code we
speak of, so you already knew that didn't you? There is a whole list
of exclusions, inclusions and dependancies based on when you bought
the house, and which way the wind is blowing when you get audited.
You can also have a vacation home fall under these rules.

It's complicated, but when you bought the house has NO bearing on it
(other than obviously that you must have bought it at least two years
earlier unless you get one of the special exceptions for "involuntary"
sale). The only other obvious mess is if you rolled the profit from the
sale of a house previously (under the old rules) into the current house.
All that does is change your basis. It doesn't change the capital
gains exclusion.

When you bought can most certainly have all sorts of implications, and
what you did at that time can also have all sorts of ramifications.
Read IRS Publication 523 and count the number of times phrases like
"before July 19, 1984" appear. No, none of the rules appear to change
the current capital gains exclusion, but very few people outside of
California or the Washington, DC area will every realize a gain of over
$250K. Since capital GAIN cannot exist without a BASIS the idea that
"all that does is change your basis" is rather silly. When considering
any delta, where you start is as important as where you finish.

This guy goes into a situation that just makes my head hurt.

http://www.washingtonpost.com/wp-dyn...052600807.html

Not sure how to relate this back to the 'built' part of homebuilt.

On Tue, 05 Sep 2006 03:15:21 -0400, Ron Natalie
wrote:

J.Kahn wrote:

Is it possible to have the aircraft appraised upon completion to
establish a base line value, then pay gains tax on the increase from
that upon sale? It seems grossly unfair to be taxed on the full
difference between the original materials cost and the later sale price.

That's the wway it is.

And it applies to *everything* you sell. They just don't normally
bother with small items.



For example, in Canada you don't pay capital gains tax on a personal
residence but you do on income property.

In the US you owe capital gains on your residence, but there is an
exclusion of $250,000 if it is your principle residence for 2 out of
the last 5 years.

There's no such exclusion for most anything else/
Roger Halstead (K8RI & ARRL life member)
(N833R, S# CD-2 Worlds oldest Debonair)
www.rogerhalstead.com

Roger (K8RI) wrote:

On Tue, 05 Sep 2006 03:15:21 -0400, Ron Natalie
wrote:


J.Kahn wrote:


Is it possible to have the aircraft appraised upon completion to
establish a base line value, then pay gains tax on the increase from
that upon sale? It seems grossly unfair to be taxed on the full
difference between the original materials cost and the later sale price.

Actually, by paying capital gains on the cost
difference, and ignoring your labor you ARE
getting a tax break although it might not seem
like it at first. They are letting you get away
with paying capital gains on income that was
derived from your labor. Normally that would be
self-employment income, and you would have to pay
the higher rate plus ~17% for Social Security and
Medicare. (USA)


That's the wway it is.


And it applies to *everything* you sell. They just don't normally
bother with small items.

Amen to that.

Don W.

So few homebuilt designs can be sold for much more than the materials
cost, it hasn't been much of an issue in the past. There are a few
designs than you can make some money on, but most of the profits would
be marginal at best. And if the plane were sold with no mention of it
made at tax time, it would be a very rare event for the IRS to
investigate it. They'd have to be looking at you for something else to
run across something like that. But if your record keeping is poor,
like mine is, it may be very difficult to get a good handle on what
you spent on materials. And what if some of the parts were bought at
the flymarket for cash? And you have no receipt? Private sellers at
flymarkets rarely give receipts. It would seem the answer would be to
jot down the expenditures in your builder's log or in a ledger for
items bought that way. They couldn't disallow the materials cost
because you don't have a receipt for every item. Obviously, if you
have the parts, you had to pay for them, they just don't pop in out of
thin air. I've seen entire kits for sale at the fly markets, and they
are usually cash deals. Plus, abandoned kits are offered for sale in
Trade a Plane, many of which are paid for in cash. The IRS can't
disallow an expenditure because you used cash to pay for it. If you
record the purchase, they have to accept that. If not, take 'em to tax
court over it. At least with a kit purchased from an ad, you could go
back to the seller to verify the sales price, but the fly markets
sometimes are more anonymous.

Convair wrote:
... And if the plane were sold with no mention of it
made at tax time, it would be a very rare event for
the IRS to investigate it.

If there's a substantial gain on sale, that's tax evasion, a
crime. All it takes is an informant to get the ball
rolling. IRS occasionally uses FAA records of aircraft sales
in a project to look for possibilities.

They couldn't disallow the materials cost because you
don't have a receipt for every item. Obviously, if you
have the parts, you had to pay for them, they just don't
pop in out of thin air....
If you record the purchase, they have to accept that.
If not, take 'em to tax court over it.

You'll lose in Tax Court. IRS may have to allow a partial
deduction for inadequate records if you're in business, but
that rule (the "Cohan rule") does not apply to a personal
asset sale. Tax Court litigation is so expensive, that
you'll end setting anyway at best; but the tax rate is only
15%. If you're shy on receipts for $10,000 in parts, that's
$1,500 tax, but it may cost $2,500 for an attorney to appeal
the case. So you accept the examiner's "settlement" offer
of $1,500 tax deficiency.

Fred F.

On Thu, 14 Sep 2006 11:18:35 -0400, TxSrv wrote:

Convair wrote:
... And if the plane were sold with no mention of it
made at tax time, it would be a very rare event for
the IRS to investigate it.

If there's a substantial gain on sale, that's tax evasion, a
crime. All it takes is an informant to get the ball
rolling. IRS occasionally uses FAA records of aircraft sales
in a project to look for possibilities.

They couldn't disallow the materials cost because you
don't have a receipt for every item. Obviously, if you
have the parts, you had to pay for them, they just don't
pop in out of thin air....
If you record the purchase, they have to accept that.
If not, take 'em to tax court over it.

You'll lose in Tax Court. IRS may have to allow a partial
deduction for inadequate records if you're in business, but
that rule (the "Cohan rule") does not apply to a personal
asset sale. Tax Court litigation is so expensive, that
you'll end setting anyway at best; but the tax rate is only
15%. If you're shy on receipts for $10,000 in parts, that's
$1,500 tax, but it may cost $2,500 for an attorney to appeal
the case. So you accept the examiner's "settlement" offer
of $1,500 tax deficiency.

Fred F.


Informants? The IRS tactics sound more like the Gestepo and KGB, than
a government agency. But it's good to know. Thanks for the tips on
what to aviod.

Informants? The IRS tactics sound more like the Gestepo and KGB, than
a government agency. But it's good to know. Thanks for the tips on
what to aviod.

Actually, in most cases the "informant" is an
ex-wife, ex-girlfriend, ex-partner, or ex-friend,
so it is not they keep paid informants.

So, if you are not reporting all of your income it
really pays to not **** off the other people
that might know or suspect.

Also, pay attention to what the other poster said
about keeping receipts and tax court. When
dealing with the IRS the burden of proof is on you
when you claim a deduction or expense. They do
not have to take your word for it.

Don W.

newsreader wrote:
...
Informants? The IRS tactics sound more like the Gestepo and KGB, than
a government agency. But it's good to know. Thanks for the tips on
what to aviod.

IRS is just the recipient of info supplied by "good citizens."
Often people who do not report a transaction not on Form 1099
can't resist bragging to others about it.

F--

"newsreader" wrote in message
...

Informants? The IRS tactics sound more like the Gestepo and KGB, than
a government agency.

(OT)
And what do you think Gestapo and KGB were/are,
except government agencies?