If I buy land and build a house on the land, can the cost of construction be subtracted from the capital gain when selling the house?
For example, if I buy land for $600,000 and then build a house on it which costs $750,000 to build, my total costs are $1,350,000. If I then sell the house for $1,500,000. Would I then be liable for a $150,000 capital gain?
Yes, the cost of building the house is factored in, but you don't necessarily have capital gain, it could be taxed as ordinary income.
If you're building a house to sell, the IRS views it as a business activity rather than an ordinary investment. You won't pay capital gains, the $150,000 will be taxed as ordinary income, plus self-employment/payroll tax depending on your business structure.
If you build a house, live in it then sell, the cost of constructing the house is a capital improvement which adds to the basis of the house for capital gains purposes. As your primary residence you can get some exclusion on the capital gain if you lived there for 2 years, and in some cases a pro-rated exclusion even if you lived in it fewer than 2 years.
If you buy land or a house, do nothing to improve it, don't live in it, and re-sell it for more, you have capital gains.
There are a number of other considerations for determining when real-estate transactions are taxed as ordinary income instead of capital gains, you'd want to consult an accountant to understand the specifics of your situation fully, but in general building to sell is a business activity in the eyes of the IRS. Given short-term capital gain rates being the same as ordinary income tax rates, the importance is whether or not self-employment tax is also due. The best tax-advantaged building/flipping scenario is living in the house for 2 years before moving to the next.
Certainly. It cost you $1,350,000 to buy/construct an asset (land + house) that you sold for $1,500,000, so your capital gain is $150,000.
Note that the first $250,000 ($500,000 if married filing jointly) of capital gains from the sale of your primary residence are exempt from capital gains taxes. If this is an investment (flip) or rental property, the exemption does not apply. (those are broad generalities - there are of course specific circumstances that can change whether all or part of the gain is exempt or not)
(I avoided the "subtracted from the capital gain" language since the capital gain is what you sell it for plus what it costs you, so construction costs would apply to the cost side, and are not "subtracted" from the net gain).
