Investor · North Augusta, SC · Member since 2015 · 52 posts · 14 votes
I'm in a bit of a unique situation that I'm sure others have been in, but is new to me:
I am under contract to close on a new rental property in early January 2016. The terms of my purchase contract stipulate that I am allowed access and permission to repaint the interior, as well as install a tile backsplash in the kitchen prior to close.
This work, along with granite countertop installation (paid for by seller allowance) will be performed in December 2015.
Can I wait to itemize the improvement costs on my 2016 returns even though the receipts will be dated 2015?
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
10y
@Kevin Kroll I'd argue that since you don't own the property yet, you can't place it into service, so rehab costs will be capitalized until you can place it into service, which will be next year.
The question I'd pose is: who owns the improvements? This will be determined by your contract with the seller of course, but you can very easily lose rights to the improvements you make pre-close which also means you lose the right to utilize the related deductions on your tax returns.
I'd caution you to make sure the contract very clearly establishes who owns what and how you will recoup your investment if the contract falls through, though I'm sure you've already done all of that.
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
10y
@Kevin Kroll I'd argue that since you don't own the property yet, you can't place it into service, so rehab costs will be capitalized until you can place it into service, which will be next year.
The question I'd pose is: who owns the improvements? This will be determined by your contract with the seller of course, but you can very easily lose rights to the improvements you make pre-close which also means you lose the right to utilize the related deductions on your tax returns.
I'd caution you to make sure the contract very clearly establishes who owns what and how you will recoup your investment if the contract falls through, though I'm sure you've already done all of that.
As a general rule, any money you spend to make a newly acquired rental property ready for rental use is a capital expense and an adjustment to basis. You can only recover your initial make ready costs through a depreciation expense after the property is placed in service as a rental. After the property is placed in service, then ongoing maintenance and repairs can be expensed.
Investor · North Augusta, SC · Member since 2015 · 52 posts · 14 votes
10y
Thanks guys, I should have been clearer in my terminology. I am not thinking about itemizing these as repairs, rather filing as capital improvements to be factored into depreciation.
My concern was only with regards to the acceptability of delaying capital depreciation until 2016 when the expenses were incurred in 2015.
Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
10y
That is a unique situation....I always recommend buyers not spend any money improving property until after closing. I know you have a contract, but you never know what could happen....