sweat equity as basis in home for sale

[Trnr395]

I know a person who is selling his property. It consists of several log cabins, one in which is used as their main home. He built these all himself and they are worth well over 1 million dollars. He will exclude 500,000 because it has been his main home but the remainder of the gain will be taxed. He asked me in passing about he heard that "sweat equity" can be figured in. Basically since he built this property himself it cost him well below what it would of cost to hire a contractor. I have no doubt that the property is worth this amount but told him I was unaware of any "sweat equity" that you can use to increase the basis of the property and in turn reduce the capital gain on the sale. Anybody have any insight into the truth of this?

[Ray in Ohio]

Can I deduct the "stress" that comes with tax season too? This stress can cost me a lot of headeaches etc.

[JohnH]

Tax basis of sweat equity is worth a bucket of warm sweat.

He can add the cost of the bucket to his basis, but not the sweat.

[jainen]

>>well below what it would of cost to hire a contractor<<

Indeed, and that's why there is no further tax break. Payment to a contractor would be considered as made with after-tax funds. If he had wanted to include his labor in the basis, he should have paid himself a taxable wage. I am not being sarcastic this time. This is relatively common. The wage is typically paid through a corporate or other entity.

[Jack from Ohio]

His sweat equity is the reason he has so much income to pay taxes on. Isn't that the reason to "do it yourself?"

[ljwalters]

Maybe not sweat but the cost of all the materials including would be added to basis. Did he keep good records and receipts?

And don't for get the appliances he is leaving and the landscaping he is leaving the cost of the road. The cost of having utilities brought in. I can't imagine he has no basis at all just because he did the labor himself.

Linda and buddy

[SaraEA]

What these do it yourselfers don't understand is that they ARE getting paid for their labor, at very advantageous tax rates, through the price they are getting for the property. I used this example for a guy in the same exact situation last week: Say you bought the place for $200k, put $100k materials and a lot of work into it, and are now selling at $800k. Your just got paid a half mil for your labor, and you don't have to pay income tax rates but favorable capital gains tax rates on that income. Can't get better than that.

The guy actually wanted his S Corp that owned the property to pay his LLC for his work. That would have made the income subject to his income tax bracket and SE as well. Jainen says this is relatively common. It's a stupid move, but it makes the guy thinks he got paid for his work whereas profit on the sale doesn't trigger the same feeling. No wonder our clients need us.

[jainen]

>>It's a stupid move<<

It isn't an all-purpose solution. But it's a reasonable way to shelter money from corporate tax rates, pay kids' allowances and build retirement accounts, generate Social Security credits, and all sorts of other things.