Renovate before or after turn the primary property into a rental

Investor · San Diego, CA · Member since 2016 · 10 posts · 0 votes

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

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Pam Lin
Carlsbad, CA · Member since 2016 · 8 posts · 2 votes
10y
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.
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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
10y
@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.
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David Light
Rental Property Investor · Tomball, TX · Member since 2013 · 134 posts · 43 votes
10y
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!
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Account Closed
investor · McDonough, GA · Member since 2015 · 230 posts · 77 votes
10y
@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.
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Cathy Chang
OP
Investor · San Diego, CA · Member since 2016 · 10 posts · 0 votes
10y
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?
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Cathy Chang
OP
Investor · San Diego, CA · Member since 2016 · 10 posts · 0 votes
10y
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?
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Cathy Chang
OP
Investor · San Diego, CA · Member since 2016 · 10 posts · 0 votes
10y
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 $$$.
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Cathy Chang
OP
Investor · San Diego, CA · Member since 2016 · 10 posts · 0 votes
10y
Originally posted by @Account Closed:

@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.
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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
10y
@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.
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Cathy Chang
OP
Investor · San Diego, CA · Member since 2016 · 10 posts · 0 votes
10y
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!
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