Expense or depreciate repairs?

Question

Hi all,

I purchased a duplex in July and gave both sides notice to vacate. They both vacated Aug 1st. My question is since it was already in service on the day I took ownership, can I expense the costs to fix it up? I know bigger items such as new cabinets, flooring, carpet and appliances are depreciated but what about things like painting, replacing toilets, new vanities, countertops, ect?

Samantha Klein · Answer

I gave them notice because I like to go in and redo all my apartments when I take ownership because then I can address any potential repairs/maintenance that has been deferred. I know its not something most investors do, but it gives me peace of mind and I know what I'm working with. Also, on this particular duplex, one set of tenants were druggies and were paying $350  below market. The other side was completely disgusting, that tenant never cleaned and was also paying low rent. I fix them up right away, factor in the holding costs/vacancy costs and get better tenants paying market rent and that way I offer a quality product and new tenants that are happy to pay my rent price because its updated. I can generally update an apartment for less than 3k doing it myself with the help of a friend in the trade. As I said, not what alot of investors here do but it works for me.

JD Martin · Answer

Most of what you have listed at the end I would expense because they're not large enough to capitalize. Exception to this is if I'm bumping up against safe harbor limits.

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Christopher Smith · Answer

If there is a new owner, and the property is not yet habitable, then its not placed in service. I think that was the issue.

Dave Toelkes · Answer

@Christopher Smith

If the property is in service, it is not automatically taken out of service when a major renovation requires an extended vacancy period.

Christopher Smith · Answer

Actually I see this as kind of a close call, with the "in service" requirement being the key element of your argument. If the place is generally habitable notwithstanding the modest improvements being made I think you can make an effective "in service" argument. However, if you were tearing down walls or anything else where its absolutely clear a reasonable person would never occupy the place during that work then I think at such point you would have crossed the line and everything would need to be capitalized in one form or another.

Dave Toelkes · Answer

Just curious why you kicked out paying tenants?

Expense or depreciate repairs?

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