Easley, SC · Member since 2017 · 74 posts · 64 votes
My wife and I are about 3 years out from retirement. Both kids will be out of the house and we are looking to downsize. We have identified one of our rental properties to be our primary residence when we do this. We have several renovations planned (build 2-car garage, install solar, new kitchen and bathrooms). I'm looking to optimize our tax exposure. Would it be advantageous to perform these renovations while the unit is still a rental? Or does it even make a difference on whether renovations occur when it's a rental or when it is our primary residence?
We are anticipating the expense of these renovations to be in the neighborhood of $100-$125K.
There's certainly NO tax benefits if you do any of the work after you stop renting the property, prior to your moving in.
Whether you can derive tax benefits from doing it now is debatable. The renovations would need to qualify as "ordinary and necessary" expenses in regards to operating this property as a rental. In other words, they should be sensible whether or not you plan to live there yourself. They need to increase a rental appeal of the property and its income potential, and such increase should be proportional to the expense.
For example, if you spend $25k to rebuild a bathroom, and it warrants a $100 rent increase, it would take 20 years or more to just recoup the cost. There is no business justification if the current bathroom is serviceable.
So, some of your planned major improvements may qualify as having a business purpose, upon a closer look at the numbers. Those you should consider doing asap. The rest is personal, and there's no tax reason to do it in advance of moving in.
One more consideration: life is unpredictable. Spend money in the way that your Plan B can work, too.
There's certainly NO tax benefits if you do any of the work after you stop renting the property, prior to your moving in.
Whether you can derive tax benefits from doing it now is debatable. The renovations would need to qualify as "ordinary and necessary" expenses in regards to operating this property as a rental. In other words, they should be sensible whether or not you plan to live there yourself. They need to increase a rental appeal of the property and its income potential, and such increase should be proportional to the expense.
For example, if you spend $25k to rebuild a bathroom, and it warrants a $100 rent increase, it would take 20 years or more to just recoup the cost. There is no business justification if the current bathroom is serviceable.
So, some of your planned major improvements may qualify as having a business purpose, upon a closer look at the numbers. Those you should consider doing asap. The rest is personal, and there's no tax reason to do it in advance of moving in.
One more consideration: life is unpredictable. Spend money in the way that your Plan B can work, too.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3y
Don’t forget. If they are capex you’ll need to depreciate it over 27.5 years. So you’re talking about a $4k deduction and $1,000/year for a justifiable $100k expense. I doubt the garage would qualify unless you raise the rents significantly afterwards. The solar even less so.
Talk to your tax guy and see what they are comfortable defending to the IRS or if you don’t have a guy or a very good guy it’s time to find one. There are many good ones here. If you don’t think you’ll save more than the expert will charge I wouldn’t bother. Good luck.
My wife and I are about 3 years out from retirement. Both kids will be out of the house and we are looking to downsize. We have identified one of our rental properties to be our primary residence when we do this. We have several renovations planned (build 2-car garage, install solar, new kitchen and bathrooms). I'm looking to optimize our tax exposure. Would it be advantageous to perform these renovations while the unit is still a rental? Or does it even make a difference on whether renovations occur when it's a rental or when it is our primary residence?
We are anticipating the expense of these renovations to be in the neighborhood of $100-$125K.
Hi James, What you are planning on doing will make the property more rentable and allow you to raise the rent. Therefore, if you have not done a cost segregation study yet, you should do one prior to the renovations and prior to your occupancy. Actually, the sooner the better. There are many questions to be considered in the process of making a good decision in your situation. Waiting will NOT be in your best interest.