How to account for new Vacant property?

Question

Hi  All,

I haven't come across an answer to this specific instance. In 2015 I purchased a run down multi-family property. I have been renovating it, putting in ~30k in 2015. Now in 2016 we will soon be renting out the units. For all of 2015, however, the building remained vacant.

I'm wondering if I can count the depreciation expenses from 2015 in that year, and if not, can they be carried over to 2016?

Brandon Hall · Answer

@Arun Gokhale the question you must answer is: when was the property placed into service?

The placed in service date is the date it was advertised for rent. You will need documentation proving the placed in service date (i.e. a copy of the advertisement).

If the property was not placed in service in 2015, then you must ask yourself if it's in the same geographic region as other properties you own. If the answer is "no" or "I don't own other properties" then you cannot claim any expenses associated with the property in 2015. These expenses will be carried over into 2016 as start-up expenses, however you will not carry over depreciation as the first day you can depreciate a property is the day you place it into service.

If you have properties in the same geographic area but the property in question was not placed into service (advertised) for rent in 2015, then you can deduct operating expenses. Depreciation will not be deductible until the first day you placed it into service.

If you placed it into service in 2015, then you may deduct expenses associated with the start-up and you may start depreciating. Keep in mind that if you are performing a rehab, most of those expenses will be capitalized and depreciated over 27.5 years rather than currently deducted, unless you have a "placed in service strategy" which a real estate savvy CPA can help you with.

Hope this helps!

Brandon Hall · Answer

@Arun Gokhale correct. Keep in mind that the IRS tries to minimize the scope of "geographical area" so a property around the corner will count, but a property on the other side of the city may not.

Arun Gokhale · Answer

This is very helpful, thank you! Just to clarify, my management fees for the new property could be deducted from another property I own in the area, but things such as a roof and new appliances could not be depreciated until I put it into service?