While building a new home, many people have a common query whether or not the contract labor costs are tax deductible. However, it should be noted here that you will not be able to deduct payments that you make to the contractor for the labor costs. You will also not be able to deduct any other expenses arising due to construction of the new home. Even after knowing this, you should still keep a note of all the expenses that you make toward the building of the new home. This will be of great help to you in the future as it will help you increase the adjusted basis in the property thereby lowering your tax obligation.
Check out the breaks available on some expenses
When you sell off your home, you will be liable for paying capital gains tax if you incur profit. However, if you meet certain criteria, then you may be able to exclude some of your gains. Make sure that you report the gains of Schedule D of your 1040 Form. It should be noted here that you will be able to lower the capital gains taxes on sale of the property in case of expenses in the field of property improvements, along with selling and administrative costs.
In order to be on the safe side, you should keep a record of all the invoices given to you by the contractor. You should also keep a track of the building materials that are used while construction of the home. The IRA (Internal Revenue Service) also states that your basis in the home is the cost of land along with the amount it cost you to complete the house which include:
- Fees of the architect.
- Payment made to the contractor.
- Charges for building permit.
- Cost of labor and materials.
- Connection and utility meter charges.
- Legal fees associated with building the house.
Apart from this, you should also keep records of the closing costs and other Realtor fees that you have been charged. It will also help you in lowering your capital gains tax.
Primary residence exclusion
If you are planning to stay in the property for 2 years or more, the IRS has another perk to help you offset any capital gains. If you are a single filer, then you are allowed a $250,000 exclusion on any capital gains in relation to the sale of the primary residence. For those married filing jointly, this amount increases to $500,000. However, in order to get this exclusion, you will have to stay in the property for two out of the previous five years ending on the date of the home sale and you should have owned that home for at least two years. This is also known as use and ownership tests.