Writing off expenses on a property bought in December

New to Real Estate · Benson, MN · Member since 2021 · 39 posts · 13 votes

Hi everyone, my partner and I recently bought a lake cabin in the beginning of December and have started rehab on the property. We have a lot of expenses in December but have not had a guest stay at the cabin yet. Since we have not actually used air bnb yet and had a guest stay our tax advisor is telling us that we cannot write off the expenses because we don't have proof our intent with this property is investment. I am curious if anyone else has some insight on this.

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Linda WeygantPro Member

Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes

Hi @Brady Ascheman

There may be a bit of a misunderstanding as to what your CPA is telling you.

The issue here is that for most items, you can't deduct any expenses until the property is ready and available to rent. Since your rehab is still ongoing, it sounds like the date for when the property meets this criteria is still sometime in the future. Or at least, is not in 2022.

There are a few small expenses that may be deductible, but by and large, the expenses that you're incurring on the rehab will become part of the depreciated basis of the property.

So your CPA is correct that you can't write off the expenses yet and you may, in fact, end up depreciating them rather than writing them off. The issue of not proving your intent with the property isn't quite right though, so I'd just clarify that your CPA is truly a real estate specialist or make sure you understand the issues they are communicating.

Best of luck to you!

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Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
Get a new CPA
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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
3y
Hi @Brady Ascheman
There may be a bit of a misunderstanding as to what your CPA is telling you.

The issue here is that for most items, you can't deduct any expenses until the property is ready and available to rent. Since your rehab is still ongoing, it sounds like the date for when the property meets this criteria is still sometime in the future. Or at least, is not in 2022.

There are a few small expenses that may be deductible, but by and large, the expenses that you're incurring on the rehab will become part of the depreciated basis of the property.
So your CPA is correct that you can't write off the expenses yet and you may, in fact, end up depreciating them rather than writing them off. The issue of not proving your intent with the property isn't quite right though, so I'd just clarify that your CPA is truly a real estate specialist or make sure you understand the issues they are communicating.

Best of luck to you!
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John Duston
Accountant · Santa Barbara, CA · Member since 2016 · 213 posts · 66 votes
3y
@Brady Ascheman
I second Linda's answer. You can claim all of your expenses as an increase to the properties basis but as the property isn't in service this year you're not gonna be deducting very much on your taxes this year.
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Account Closed
Tampa, FL · Member since 2020 · 60 posts · 43 votes
3y
Taken directly from the IRS website:
Depreciation – Allowances for exhaustion, wear and tear (including obsolescence) of property. You begin to depreciate your rental property when you place it in service. You can recover some or all of your original acquisition cost and the cost of improvements by using Form 4562, Depreciation and Amortization (to report depreciation) beginning in the year your rental property is first placed in service, and beginning in any year you make improvements or add furnishings.
Generally property is considered placed in service when it is ready and available for a specific use, regardless of whether or not it is actually used at the time. For example, a house purchased for use as rental property is placed in service when it is ready and available to rent, even if it is not actually rented at that time.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
3y
Whether a guest stayed at the property is not really an important point.
It is whether the property was properly placed into service in 2022 which requires that the property be in livable condition and you actively marketed the property for rent.
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