keeping track of the basis of a rental

17 Replies

I just purchased my 5th rental and I am in need of some advise on how to set up books and track the basis of this house. I past attempts have not been without problems. What categories do you use? Once the house is rented my book keeping seems fine.

Any ideas?

Thanks, LuAnn

Hi LuAnn, when you say basis are you referring to the depreciable basis of each property and tracking the accumulated depreciation?  

I am not sure, What is the difference?

Probably referring to cost basis as your depreciable basis is just your initial cost. There's no magic way to track expenses-- use excel. Start with your cost of the purchase and your first year placed into service work with a CPA to calculate what your annual depreciation should be. Track other cash expenses as you would a typical personal finance budget; Revenue minus Expenses.

Yes, you are correct, that is what I am referring to. I heard you can depreciate the appliances and flooring on a faster depreciation schedule to recoup your basis faster.  Does anyone do this? Is there any other items that will depreciate faster?

You definitely can depreciate other items faster LuAnn if there is a way for you to break out the costs for these items separately from the structure.  Might be tough to do this without a cost segregation study or a specific allocation in the purchase agreement, but definitely depreciate over shorter lives for these type of items you purchase for the unit.

-The structure itself would be depreciated over 27.5 years straight-line (equal amount per year).

-Landscpaing work, parking lots, sidewalks you could do over 15 years using 150% declining balance (basically the amount per year would be 1.5x what straight-line would be)

-Appliances, carpet, and similar items could be over 7 years using 200% declining balance

My CPA firm works with alot of clients with rentals in a variety of different ownership structures.  I would definitely recommend finding a CPA in the area as there can be some quirky areas of rental real estate in addition to the depreciation rules.

I would also agree with Mark D. on what he said, probably easiest thing for all other expenses is just to track it on a per property basis in an excel spreadsheet.  QuickBooks also works pretty well and allows you to  break out revenue/expenses by property but will be a little more complex and expensive than a simple excel spreadsheet.

I use Quicken for my accounting.  More untuitive than Quickbooks and does everything I need. TurboTax generates my depreciation schedules, and tracks depreciation taken.  

@Erik Sell  

I believe furniture, area rugs, appliances, etc. have a five year class life.  The seven year class life is for anything that does not go anywhere else.  I have never need to use the seven year class life for anything related to my rental property.

Originally posted by @LuAnn Vigen:

I just purchased my 5th rental and I am in need of some advise on how to set up books and track the basis of this house. I past attempts have not been without problems. What categories do you use? Once the house is rented my book keeping seems fine.

Any ideas?

Thanks, LuAnn

 Quicbooks or an excel spreadsheet are your best bet. I recommend QB as you can track by property and you can even invoice clients this way. 

You could be right Dave, I didn't double-check that.  Was just going off memory.  The 7 year is kind of the catch-all for those kind of items.  

You are asking for an accounting and tax nightmare.

In the year you purchase and rehab a buy and hold property, capitalize everything till you get it ready for rent. After that write off all repairs.

Simple

I am not a tax advisor or attorney. Take it for what its worth but accounting and taxes should not be a burden. Keep it simple.

Originally posted by @Arlan Potter:

You are asking for an accounting and tax nightmare.

In the year you purchase and rehab a buy and hold property, capitalize everything till you get it ready for rent. After that write off all repairs.

Simple

I am not a tax advisor or attorney. Take it for what its worth but accounting and taxes should not be a burden. Keep it simple.

That is too much if a simplification. What if the "repair" entails a tear off of the roof and full replacement?  If you think you will just deduct that fully in the year the work was done ... the IRS might disagree about that. 

@Steve Babiak 

The only part of your post I disagree with is that the IRS "might" disagree.  They 100% will disagree if your return gets looked at.  Some of the most significant regulations the IRS has come down with recently deal with this, it's an issue they are focusing on.  

Originally posted by @Erik Sell:

@Steve Babiak 

The only part of your post I disagree with is that the IRS "might" disagree.  They 100% will disagree if your return gets looked at.  Some of the most significant regulations the IRS has come down with recently deal with this, it's an issue they are focusing on.  

Erik - the reason for using "might" is that the IRS would have to audit, and 100% of returns do not get audited. 

Originally posted by @LuAnn Vigen:

Yes, you are correct, that is what I am referring to. I heard you can depreciate the appliances and flooring on a faster depreciation schedule to recoup your basis faster.  Does anyone do this? Is there any other items that will depreciate faster?

 Luann,

That involves what is called cost segregation. Unless you did all those items upon your purchase, you will will have to do what is called a Cost Segregation Study which can be cost prohibitive for SFR.

I have a chart posted until resources that anyone can take a look at to see examples.

Rental Depreciation Chart Class Life

Steve, The chart will be a good tool when I do my basis. The new tax rules (2014)look like it will be harder to write off the repairs in a single year. Now instead of a building being one unit of property, a building is considered 9 separate units of property. Such as, roof, electrical,plumbing etc. are all considered separate units of property.  If you replace a water heater you have to take the cost of that and compare it to the value of the plumbing in the building, to determine if it was a repair or improvement. Is anyone else aware of these new rule

@LuAnn Vigen  

"If you replace a water heater you have to take the cost of that and compare it to the value of the plumbing in the building, to determine if it was a repair or improvement. Is anyone else aware of these new rule"

I am certainly not an expert and I have only given the new rules a cursory glance.  My impression is that the rule you reference is to be applied to repairs.  Before the new rules, replacement of a water heater had always been capitalized and depreciated and a roof replacement was always capitalized and depreciated.  I don't see that the new rule has changed this.  The problem is determining whether a major repair is an improvement. How much of the roof can you repair before you cross the line to having the repair classified as an improvement?  I believe the rules are to give us guidelines to determining when an extensive repair is an improvment.  For example if I repair a portion of my roof for $7000, but a complete replacement would cost only $13000, then my repair cost exceeds 50% of the replacement cost, and thus would be deemed a capital improvement rather than a repair.  In this instance, I cannot deduct the cost of a repair, but instead have to depreciate the cost over 27.5 years.

If I have this wrong, I expect @Steven Hamilton II  will put us both on the right track.

No you do not have to compare it to the cost of all of the plumbing. What you must do is determine if it was a repair vs improvement. If you replaced, it was an improvement. a repair is just that fixing someone broken.

There is also a dollar threshold on it as well of $500.

http://tax.cchgroup.com/downloads/files/pdfs/legis...

Here is another great summary that I like even better: http://wblcpa.com/how-the-final-repair-and-capitalization-regulations-will-impact-you/

I agree with Dave NA on using Quicken and TurboTax.   One benefit of going that route is you can see your "business/investment properties" along with other retirement accounts, checking accounts, etc.  While you still run the business as a business, it's good to see how your personal cashflow is doing (and easily track your net worth).

Handling the depreciation in TurboTax is very easy.

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