basis tracking on 26 months of my own labor, where does the line fall

Question

I'm two years out of a different career and running the numbers on a live-in flip before I commit, and the piece I can't resolve is basis.

Say purchase at $265,000, and over 26 months I put in $58,000 of materials and subbed out $34,000 of electrical, plumbing and roofing. I do the demo, framing, tile, cabinets and paint myself. Call it 900 hours of my own time. Projected sale $430,000.

Gain against a $92,000 documented basis addition is roughly $73,000 before selling costs, comfortably inside the single-filer exclusion, so on paper the tax question is moot. My problem is that I'm treating my 900 hours as free, which makes the whole deal look better than it is. If I priced my labor at even $35 an hour that's $31,500 of value I created that never shows up as a cost anywhere, and it also can't go into basis. So am I actually making $73,000 or am I making $41,500 and paying myself badly?

And a second thing. If the exclusion covers the gain anyway, does careful basis tracking matter at all on a deal this size, or is it only insurance against the sale coming in higher than I think?

bmoreno23 · Answer

Adding one thing I left out. The $58,000 materials figure assumes I buy at retail with no contractor account, which after talking to a few people may be 10 to 15 percent high on lumber and tile. That widens the gap between what I spend and what a contractor spends, which cuts the other way against my labor being worthless.

aaron_fitz10 · Answer

Your own labor can't go into basis, that part is settled. But I don't think you should book it as a cost either. You'd be paying somewhere to live for those 26 months regardless, and the hours come out of evenings and weekends you weren't billing anyone for. If you had a $60 an hour side gig you were turning down to tile, then yes, count it.

paulgrant17 · Answer

$35 an hour for tile and cabinet work is low if you're comparing to what a contractor charges. Quotes I've seen for cabinet install alone land well above that once you include their overhead.

hannah_west29 · Answer

The labor question is a preference question and it won't move the deal. What will move it is your sale assumption. $430,000 on a $265,000 purchase plus $92,000 in is a 9 percent margin over all-in cost of roughly $357,000, and you haven't taken out selling costs yet. Commission plus transfer tax plus title, and transfer tax varies a lot by state, easily runs 6 to 8 percent of $430,000, so call it $30,000. Now you're at $43,000 of gain over 26 months, before you've spent a dollar over budget.

On basis tracking, keep the records regardless. The exclusion is a cap, not a blanket, and if the market moves or you refinance or your marital filing status changes, the number you can exclude changes with it. Records cost you a folder. Reconstructing 26 months of receipts from memory costs you real money and you may not be able to do it at all.

jessreyes12 · Answer

@ledger that 6 to 8 percent is the part I always leave out of my own spreadsheets and it's usually the difference between a deal and a wash. @ember did you have a contingency line at all, or is the $58,000 the whole materials plan? 26 months of a roof, plumbing and electrical means at least one surprise behind a wall.

basis tracking on 26 months of my own labor, where does the line fall

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