Renovate before or after turn the primary property into a rental

10 Replies

Hi, BPers,

I plan to turn my current primary property into a rental one within one year. Right now it has 2 bedrooms, after it becomes a rental, I want to renovate it to 3 bedrooms. Should I renovate before or after I find my new primary property, as far as tax reasons concerned? I would like to depreciate the improvements costs as basis for the rental.

If I renovate it now (still primary), may I depreciate the cost?

Many thanks!

Cathy

When you convert personal property to business property, the depreciable basis on the property is valued at the lower of adjusted basis or fair market value of the property at time of conversion. For example, if you purchased the home for $200k and at the time of conversion, the FMV is $300k, your depreciable basis (excluding land) would be the $200k basis. If you decided to improve the home by renovating $50k, your basis would now be $250k. Had you converted at $200k and add $50k of improvements, your depreciable basis would still be $250k. However, if the FMV is lower than your adjusted basis, it would be best if you waited until after the conversion since you'd get dollar for dollar on your improvements.

Depreciation is a concern but gain on sale will also be something worth planning for. I'd talk to a tax accountant about it.

Some good advice on accounting above. Other things to consider may be the ability to renovate while living in the property. A live in rehab, especially adding a bedroom, can be challenging and very stressful.

It would also be worth comparing the projected rent of the 2 bed and 3 bed to the cost of the renovation. Sounds like you may have already don't that but thought it was worth mentioning. Good luck!

Originally posted by @Pam Lin :

When you convert personal property to business property, the depreciable basis on the property is valued at the lower of adjusted basis or fair market value of the property at time of conversion. For example, if you purchased the home for $200k and at the time of conversion, the FMV is $300k, your depreciable basis (excluding land) would be the $200k basis. If you decided to improve the home by renovating $50k, your basis would now be $250k. Had you converted at $200k and add $50k of improvements, your depreciable basis would still be $250k. However, if the FMV is lower than your adjusted basis, it would be best if you waited until after the conversion since you'd get dollar for dollar on your improvements.

Depreciation is a concern but gain on sale will also be something worth planning for. I'd talk to a tax accountant about it.

 @Pam Lin, Thanks a lot for your input. A follow up question, how will I know about the FMV? Where does this number come from?

Originally posted by @Logan Allec :

@Cathy Chang "If I renovate it now (still primary), may I depreciate the cost?"

No.  Depreciation begins when an asset is placed in service, which in your case would be when your house is ready and available for rent.

 Logan Allec

Many thanks for your answer, but how to define "an asset is placed in service"? I move out of the current primary property? Or I close my new home? What is the legal time point?

Originally posted by @David Light :

Some good advice on accounting above. Other things to consider may be the ability to renovate while living in the property. A live in rehab, especially adding a bedroom, can be challenging and very stressful.

It would also be worth comparing the projected rent of the 2 bed and 3 bed to the cost of the renovation. Sounds like you may have already don't that but thought it was worth mentioning. Good luck!

 A very good point. Yes, I already compare the numbers. One more bedroom is worth the $$$.

Originally posted by @Russ Brantley :

@Cathy Chang

I am thinking of turning my current primary residence into another rental when I move. The house needs a driveway very badly. My CPA says it would be better tax wise to replace the driveway AFTER I make it a rental. 

 Thanks for sharin. I think I got my answer from your story.

Originally posted by @Logan Allec :

@Cathy Chang, as stated, this would be when your house is ready and available for rent.  This would presumably be when you have moved out of the house, the rehab is done, and the house is available for a tenant to use.

 Thank you!