Rental Property Investor · Potomac, MD · Member since 2016 · 115 posts · 64 votes
How is the capex reserve fund handled tax-wise in an LLC (or S-Corp)?
Over the year, a portion of the rental proceeds are siphoned off into an account for future upgrades (roof, furnace, rehab, etc). Does that count as a business expense even though the actual upgrade is in a future year? Or do you pay taxes on those funds and take the deduction when the actual expense occurs?
@Todd Magin, for capex reserves the rental proceeds are not siphoned off.
What happens is most lenders require a minimum of $250 per door for capex. I buy 100 to 400 unit deals so let's say on a 200 unit deal the capex reserve is $50k ($250 x 200 units) or $4166 a month. The $4166, along with your mortgage payment and other reserves like taxes and insurance are paid from operating cash flows.
This capex reserve NEVER hits the P&L it is 100% recorded to the balance sheet. (Sorry my inner CPA speaking to you).
To get the money back from the lender and after you complete a capex project, you submit invoices and cancelled checks to the lender. Some lenders will send a reimbursement via check, ACH or wire right away. Other lenders might send a 3rd party inspector to confirm you actually did the work. This could delay you getting your reimbursement back.
@Todd Magin, for capex reserves the rental proceeds are not siphoned off.
What happens is most lenders require a minimum of $250 per door for capex. I buy 100 to 400 unit deals so let's say on a 200 unit deal the capex reserve is $50k ($250 x 200 units) or $4166 a month. The $4166, along with your mortgage payment and other reserves like taxes and insurance are paid from operating cash flows.
This capex reserve NEVER hits the P&L it is 100% recorded to the balance sheet. (Sorry my inner CPA speaking to you).
To get the money back from the lender and after you complete a capex project, you submit invoices and cancelled checks to the lender. Some lenders will send a reimbursement via check, ACH or wire right away. Other lenders might send a 3rd party inspector to confirm you actually did the work. This could delay you getting your reimbursement back.
Moving funds into a special account designated for a specific purpose is no different than creating a budget - - it's non-transaction, non-deductible, non-expense - - just a prudent management choice.
You are taxed on the rental income minus expenses. If some of the profit is put in a different account for a rainy day fund (or anything else you want to call it.) It is not and "Expense" and it is not deductible.
Thanks guys!! There are so many little things to learn! When I finally get an accountant on board, they'll set me straight on such matters, but I want to know as much as I can about everything so I can see the big picture before I do my first deal.
Quick, I hope additional question on figuring out the right amount of cap reserves to hold per month. I see lots of per unit figures in the range of $250-$400, but when I account for all the things that cap reserves will need to buy in the coming 8ish years like flooring, refrigerator, hvac, oven, dishwasher, microwave, fixtures, water heater, etc...I always come up with a figure ($500-$700) that is quite a bit more than anyone else seems to use. I add up all the expenses, divide the total by 8 years and then again by 12 months. This does not even account for 20-30 yr items like roof, windows, structure that will last longer than my time horizon. What am I doing wrong? Or am I right and I just need to allocate based on my understanding? Thanks for the thoughts.
With the information I use I don't have that many 8 year items. I indeed have 8 yrs for (only):
Water heater (so far every single one has lasted quite a bit longer than that...)
Appliances (they typically die on me in year three or so... damnit)
HVAC: 10
Flooring: 6
Fixtures: 10
Paint: 5
Components such as garage doors, breakers, etc: 10
Landscaping (where relevant): 5
Everything else is either 20 or 30 years. I have that from an Excel I came across a while ago. No idea if this is the right figures but it seems reasonable. It's anyway always an assumption, not to mention that the actual price figures you put in there will vary quite a bit depending on the region, simply because they also include the labour. And that varies greatly over the country from what I have seen so far. I wouldn't beat myself up. Also bear in mind that should there be an HOA then quite a few major line items are covered by the HOA (which of course doesn't mean that there then might not be a special assessment around the corner...).