Brrrr, Househacking, and taxes Oh my

[David Roberts]

Hi BP, I'm an aspiring REI from Columbus, OH preparing to make my first deal and this is my first post :) I've owner occupied a SFH in a high-appreciating neighborhood of Columbus for the last 6 years (Clintonville). I'm ready to turn this property over and use those profits to start investing in buy/holds in and around Columbus. I've identified House-hacking a multi family building up to 4 units that needs some rehab with FHA financing to be an ideal first move for me, but am also considering cash purchase of a Multi or SFH to do a live-in rehab which I would later refi and rent out. In all 3 strategies I have the same question for those of you who have done this before - and it's related to taxes: ...are there any rehab timeline strategies you employ to best leverage your tax responsibilities in these types of deals? Are there any repairs/improvements that it would make sense to complete AFTER you have a tenant/lease in place? General example: Placing first tenant in December, but waiting until March to install or service the AC unit. That kind of thing... -David

[Paul Allen]

@David Roberts - great question!

The date you are concerned with is "the date the property is placed in service". Repairs done before that date are considered capital expenditures. Repairs done after that date are considered an operating expense of the business.

Capital expenditures prior to the unit being placed in service are added to the depreciable basis of the property - meaning you have to deduct the expenses over 27.5 years.

Operating expenses can be deducted entirely in the year they occur.

You do not need to have a tenant in place for the property to be "placed in service". It just needs to be 'available' and 'ready'. to be used in your business. When you hold it out for rent, it is placed in service. (Use some reasonable judgment. You can't realistically make a unit 'available' if it is uninhabitable because there is no roof.

Side note: certain items (such as replacing an HVAC) are considered capital expenditures even after the unit is placed in service.

Good Luck and Go Buckeyes!