Our first tax return, make sure we are doing this right

19 Replies

Hello all,

I am asking about taxes that were due in April 2017 (for 2016 year), filed an extension until now...

So, in May 2016 my wife and I were living in an apartment in FL with our kid and bought our first house in FL. We bought a fixer-upper that needed a roof... Our plan was to put the roof on, then move in in a month or so.

Well...that didn't work out. Basically, when we took the roof off, a ton of other damage was found, the roofers ended up getting fired, the house got drown once, and I ended up doing thousands of hours of repairs (including putting on the roof myself.) And we ended up having to re-lease our apartment, and now my wife doesn't want to move in at all so we are going to rent the house out while we live in an apartment she wants to live in instead.

Anyways, I'm now considered a real estate professional according to IRS rules, and its looks like we are going to be accidental landlords. I'll ballpark it and say we spent 60k in repairs on the house that year, along with the mortgage interest payments, home insurance payments, PMI payments, real estate taxes, water and electricity bills, etc. But the house wasn't ready for rent in 2016 and was never rented. No one has ever occupied the house.

My wife has income of 130k, I have no income, I just work on the house. As soon as its ready, it will be rented. Yes, its been under construction for a year now.

As far as I can tell, I might not be allowed to deduct anything for 2016 (over 50k startup and still not ready for rent.) But here's the list of expenses we've incurred, I just am wondering what gets added to the basis, what can be amortized over the 15 years when its finally ready, what can be put in the $2500 asset bucket for immediate expensing, and what I am taking as a total loss. And do I have to wait until its rented to start depreciation/amortization? (How does it work that I have startup expenses over 2 tax years - 2016 and 2017?) Can I deduct anything for 2016?

Mortgage Interest

Home Insurance

PMI

Real Estate Taxes

Utilities

New Roof

Rental Trucks (I have no car, we share)

Gas/Tolls

Electrical/Plumbing

Drywall, Drywall Labor

Insulation

Doors/Trim/Paint

Lawn Service

Tools

Tool Rentals

Sounds like a rough year. Ouch.

I highly recommend you see a tax professional familiar with real estate to help you get this investment property set up correctly. It may save you thousands of dollars. I see people every year who are 3 or 4 years into their real estate investment who wish they had received help at the beginning. Don't try to get some generic advice online and do it yourself. Get a pro.

Best of Luck with your Investments!

You do not deduct anything until the asset is placed into service.

So the purchase and all the remodel becomes part of the basis of the asset.  The $2500 rule does not apply to you as expenses incurred to place the asset into initial service do not fall under that rule.  That rule is intended for subsequent upgrades after the asset is placed into service.

Originally posted by @Linda Weygant :

You do not deduct anything until the asset is placed into service.

So the purchase and all the remodel becomes part of the basis of the asset.  The $2500 rule does not apply to you as expenses incurred to place the asset into initial service do not fall under that rule.  That rule is intended for subsequent upgrades after the asset is placed into service.

 As I understand it, depreciation on the basis for a residential house is over 27.5 years.  However, I see that "start up" costs when placing a rental in service are over 15 years if over 50k.  Is this not correct?

So, even though my startup costs and the purchase were in 2016, I don't put any of that on my taxes this year (I literally leave the house off the return completely), I wait until the next return and then I add all of the spending to the basis and start depreciating?  Do I have a separate column for 15 year startup costs?

Considering I was a real estate professional (by definition) for 2016, there is nothing I can expense on that list?  I have to add truck rentals to the basis of the house?  I add tools and tool rentals to the basis of the house?  (I can't separate out tools and depreciate more quickly or does the 179 deduction still exist and is available to me?)

Last question for now: if I place a for rent ad, and then I go and paint the exterior of the house, does that count as a repair after placed in service?  What about paint the interior after placing the ad?  And all of the interest, pmi, taxes, etc, while I'm waiting for it to rent - are those not current expenses instead of being added to basis?  I mean, if I'm willing to rent it unfinished at a discount and someone is willing to live in it as such, I can "repair" things while I wait for the right person, right?

What prevents someone from placing an ad the day they buy the house and expense a bunch of $2500 repairs, even though they assume no one will live in a construction zone (but maybe someone will)?

Start up costs are amortized over 15 years (the portion that was capitalized). You really should consult with a CPA, although you are late in the game for 2016 (your tax return is due Monday - although I see that you are in Boca, so you do have IRS relief until 1/31/18 as a result of Irma). 

Start Up Costs are not the same as costs incurred to put your asset into service.  Start Up Costs would be things like Market Research, Legal Fees to put together an entity or to purchase an existing business, consulting with a CPA prior to starting business, etc.  

Being a real estate professional does nothing for you in your case.  This issue comes into play when you are looking at being able to write off passive losses when your AGI is greater than $150,000.  You have neither loss nor income since your asset is not in service.

If your asset is ready to be placed into service (is habitable), then yes, as soon as you place the ad and deem it ready to be placed into service, you could then look into whether or not your upgrades are eligible for the $2500 De Minimus Safe Harbor Election.

You cannot rent a house that is not habitable, so if your remodel is such that there is no working bathroom, no working kitchen, no available heating, windows and exterior doors missing, etc., then no ad in the world is going to make your asset "in service".  Even assuming somebody would live in a construction zone, if the house does not meet the legal definition of habitable, then this would not qualify.

Originally posted by @Linda Weygant :

Start Up Costs are not the same as costs incurred to put your asset into service.  Start Up Costs would be things like Market Research, Legal Fees to put together an entity or to purchase an existing business, consulting with a CPA prior to starting business, etc.  

Being a real estate professional does nothing for you in your case.  This issue comes into play when you are looking at being able to write off passive losses when your AGI is greater than $150,000.  You have neither loss nor income since your asset is not in service.

If your asset is ready to be placed into service (is habitable), then yes, as soon as you place the ad and deem it ready to be placed into service, you could then look into whether or not your upgrades are eligible for the $2500 De Minimus Safe Harbor Election.

You cannot rent a house that is not habitable, so if your remodel is such that there is no working bathroom, no working kitchen, no available heating, windows and exterior doors missing, etc., then no ad in the world is going to make your asset "in service".  Even assuming somebody would live in a construction zone, if the house does not meet the legal definition of habitable, then this would not qualify.

 

OK, now we are getting somewhere. So, for last year (due April 2017) return, I ignore that I even had a house because it was never placed in service.

For this years return I file next April, assuming I place it into service Nov 1, I get to depreciate 2 months worth of the asset. (If I put the ad up today, can I do 2.5 months? It is habitable, we are finishing up exterior paint and yardwork.) For my basis, I figure the percentage of the sales price that is the house based on appraisers office ratio (house/house+land), then add all the mortgage interest, home insurance, PMI, RE taxes, utilities, new roof, rental trucks, gas/tolls, electrical/plumbing, appliances, drywall and labor, insulation, doors/paint/trim, lawn service, tools and tool rentals, EVERYTHING I've spent up to this point, even if it was spent in the prior year, add it to the basis, then start my 27.5 years.

I literally have to depreciate my tools over 27.5 years?  Really?  I don't separate them out, can't take a 179 (does that exist still?)

So, say the numbers for a full year in the future work out like this: rental income 30k, depreciation 17k, expenses 25k, I have a net loss of 12k a year.  My wife makes 130k, I can only write that full 12k off against her 130k if I continue to be a real estate professional, because if its a passive loss, we are phased out down to 10k allowed losses (25k minus 50% of 30k) - unless of course we get her MAGI down far enough to allow my losses without being phased-out, in which case I don't need to worry about being a RE professional anymore.

That all sound right?

I'm not a CPA, so not giving real tax advice... But I would think tools purchased to work on your rental property would qualify as business equipment and qualify for section 179 deduction.  But you really need to consult a CPA.

Originally posted by @Jeff Filali :

I'm not a CPA, so not giving real tax advice... But I would think tools purchased to work on your rental property would qualify as business equipment and qualify for section 179 deduction.  But you really need to consult a CPA.

 I mean...I'm tryin here...

@Stuart M.

You said that you did all the labor yourself.  Unfortrunately, you cannot include your own labor in your make ready costs.

Originally posted by @Stuart M. :
Originally posted by @Jeff Filali:

I'm not a CPA, so not giving real tax advice... But I would think tools purchased to work on your rental property would qualify as business equipment and qualify for section 179 deduction.  But you really need to consult a CPA.

 I mean...I'm tryin here...

 I'm sorry but you are trying to get answers from a forum, not a qualified CPA. Yes there are very valuable resources here and qualified CPAs but they don't work for free. Get a reccommendation for a great real estate CPA in your area, sit down and have a chat with them. They will be able to answer your questions more accurately in an hour then hundreds of posts from a mix of amateurs to experts on a forum can do for you. 

Originally posted by @Steven D. :
Originally posted by @Stuart M.:
Originally posted by @Jeff Filali:

I'm not a CPA, so not giving real tax advice... But I would think tools purchased to work on your rental property would qualify as business equipment and qualify for section 179 deduction.  But you really need to consult a CPA.

 I mean...I'm tryin here...

 I'm sorry but you are trying to get answers from a forum, not a qualified CPA. Yes there are very valuable resources here and qualified CPAs but they don't work for free. Get a reccommendation for a great real estate CPA in your area, sit down and have a chat with them. They will be able to answer your questions more accurately in an hour then hundreds of posts from a mix of amateurs to experts on a forum can do for you. 

 I think this is a pretty weird response to get on an open forum where thousands of people are sharing their knowledge on a diverse range of subjects for free but thank you for taking the time and contributing.

Would you give that answer to someone who asked about the 203k program? I mean, they could just read everything written by the FHA and figure out all the answers on their own, but its a shortcut to ask people who have already done so. And I guess people could say "I could tell you but I think you should pay someone to tell you instead" but i personally don't think that is the most friendly of responses.

I think people are just overwhelmed by accounting and the IRS, but I am not.  I just don't have the time to read the entire tax code to get answers to these relatively simple questions, just like everyone else here is doing with mortgage brokers, investors, etc.  I take time and answer questions, should I be charging people to share my knowledge and experience?

Originally posted by @Dave Toelkes :

@Stuart M.

You said that you did all the labor yourself.  Unfortrunately, you cannot include your own labor in your make ready costs.

 Drywall labor was other people i paid, i know i cant include my own labor. 

Originally posted by @Stuart M. :
Originally posted by @Steven D.:
Originally posted by @Stuart M.:
Originally posted by @Jeff Filali:

I'm not a CPA, so not giving real tax advice... But I would think tools purchased to work on your rental property would qualify as business equipment and qualify for section 179 deduction.  But you really need to consult a CPA.

 I mean...I'm tryin here...

 I'm sorry but you are trying to get answers from a forum, not a qualified CPA. Yes there are very valuable resources here and qualified CPAs but they don't work for free. Get a reccommendation for a great real estate CPA in your area, sit down and have a chat with them. They will be able to answer your questions more accurately in an hour then hundreds of posts from a mix of amateurs to experts on a forum can do for you. 

 I think this is a pretty weird response to get on an open forum where thousands of people are sharing their knowledge on a diverse range of subjects for free but thank you for taking the time and contributing.

Would you give that answer to someone who asked about the 203k program? I mean, they could just read everything written by the FHA and figure out all the answers on their own, but its a shortcut to ask people who have already done so. And I guess people could say "I could tell you but I think you should pay someone to tell you instead" but i personally don't think that is the most friendly of responses.

I think people are just overwhelmed by accounting and the IRS, but I am not.  I just don't have the time to read the entire tax code to get answers to these relatively simple questions, just like everyone else here is doing with mortgage brokers, investors, etc.  I take time and answer questions, should I be charging people to share my knowledge and experience?

 This was a response after multiple people, including a CPA from Florida said that you should consult a CPA. I would suggest that someone looking to use a 203k program should read the material about the 203k program yes. If there is something they don't understand then they can ask but the documents provided or people certified in the industry are the best source of information. If you make a mistake and an IRS auditor says why did you do take this deduction? Will a good answer be "Someone on a forum said that I could do it", or have the CPA you had assist with you handle any situation that arises. 

Originally posted by @Steven D. :
Originally posted by @Stuart M.:
Originally posted by @Steven D.:
Originally posted by @Stuart M.:
Originally posted by @Jeff Filali:

I'm not a CPA, so not giving real tax advice... But I would think tools purchased to work on your rental property would qualify as business equipment and qualify for section 179 deduction.  But you really need to consult a CPA.

 I mean...I'm tryin here...

 I'm sorry but you are trying to get answers from a forum, not a qualified CPA. Yes there are very valuable resources here and qualified CPAs but they don't work for free. Get a reccommendation for a great real estate CPA in your area, sit down and have a chat with them. They will be able to answer your questions more accurately in an hour then hundreds of posts from a mix of amateurs to experts on a forum can do for you. 

 I think this is a pretty weird response to get on an open forum where thousands of people are sharing their knowledge on a diverse range of subjects for free but thank you for taking the time and contributing.

Would you give that answer to someone who asked about the 203k program? I mean, they could just read everything written by the FHA and figure out all the answers on their own, but its a shortcut to ask people who have already done so. And I guess people could say "I could tell you but I think you should pay someone to tell you instead" but i personally don't think that is the most friendly of responses.

I think people are just overwhelmed by accounting and the IRS, but I am not.  I just don't have the time to read the entire tax code to get answers to these relatively simple questions, just like everyone else here is doing with mortgage brokers, investors, etc.  I take time and answer questions, should I be charging people to share my knowledge and experience?

 This was a response after multiple people, including a CPA from Florida said that you should consult a CPA. I would suggest that someone looking to use a 203k program should read the material about the 203k program yes. If there is something they don't understand then they can ask but the documents provided or people certified in the industry are the best source of information. If you make a mistake and an IRS auditor says why did you do take this deduction? Will a good answer be "Someone on a forum said that I could do it", or have the CPA you had assist with you handle any situation that arises. 

 What are you looking to accomplish here?


Originally posted by @Stuart M. :
Originally posted by @Steven D.:
Originally posted by @Stuart M.:
Originally posted by @Jeff Filali:

I'm not a CPA, so not giving real tax advice... But I would think tools purchased to work on your rental property would qualify as business equipment and qualify for section 179 deduction.  But you really need to consult a CPA.

 I mean...I'm tryin here...

 I'm sorry but you are trying to get answers from a forum, not a qualified CPA. Yes there are very valuable resources here and qualified CPAs but they don't work for free. Get a reccommendation for a great real estate CPA in your area, sit down and have a chat with them. They will be able to answer your questions more accurately in an hour then hundreds of posts from a mix of amateurs to experts on a forum can do for you. 

 I think this is a pretty weird response to get on an open forum where thousands of people are sharing their knowledge on a diverse range of subjects for free but thank you for taking the time and contributing.

Would you give that answer to someone who asked about the 203k program? I mean, they could just read everything written by the FHA and figure out all the answers on their own, but its a shortcut to ask people who have already done so. And I guess people could say "I could tell you but I think you should pay someone to tell you instead" but i personally don't think that is the most friendly of responses.

I think people are just overwhelmed by accounting and the IRS, but I am not.  I just don't have the time to read the entire tax code to get answers to these relatively simple questions, just like everyone else here is doing with mortgage brokers, investors, etc.  I take time and answer questions, should I be charging people to share my knowledge and experience?

I don't think his response merits paragraphs about how much we're charging for advice but, that's really all you're getting on a forum, advice. Tax & Legal questions involves professionals who can tailor your situation to advise you, professionally. I think Steven gave you the right advice to seek a professional..also..I wouldn't compare investor or mortgage questions with tax questions. I'm an accountant but, I go to my CPA when I have my tax issues. Dealing with the IRS when it's not just a simple Income Tax Return is always a pain, hope you figure your situation out, people are just trying to steer you in the right direction.

Originally posted by @Stuart M. :
Originally posted by @Steven D.:
Originally posted by @Stuart M.:
Originally posted by @Steven D.:
Originally posted by @Stuart M.:
Originally posted by @Jeff Filali:

I'm not a CPA, so not giving real tax advice... But I would think tools purchased to work on your rental property would qualify as business equipment and qualify for section 179 deduction.  But you really need to consult a CPA.

 I mean...I'm tryin here...

 I'm sorry but you are trying to get answers from a forum, not a qualified CPA. Yes there are very valuable resources here and qualified CPAs but they don't work for free. Get a reccommendation for a great real estate CPA in your area, sit down and have a chat with them. They will be able to answer your questions more accurately in an hour then hundreds of posts from a mix of amateurs to experts on a forum can do for you. 

 I think this is a pretty weird response to get on an open forum where thousands of people are sharing their knowledge on a diverse range of subjects for free but thank you for taking the time and contributing.

Would you give that answer to someone who asked about the 203k program? I mean, they could just read everything written by the FHA and figure out all the answers on their own, but its a shortcut to ask people who have already done so. And I guess people could say "I could tell you but I think you should pay someone to tell you instead" but i personally don't think that is the most friendly of responses.

I think people are just overwhelmed by accounting and the IRS, but I am not.  I just don't have the time to read the entire tax code to get answers to these relatively simple questions, just like everyone else here is doing with mortgage brokers, investors, etc.  I take time and answer questions, should I be charging people to share my knowledge and experience?

 This was a response after multiple people, including a CPA from Florida said that you should consult a CPA. I would suggest that someone looking to use a 203k program should read the material about the 203k program yes. If there is something they don't understand then they can ask but the documents provided or people certified in the industry are the best source of information. If you make a mistake and an IRS auditor says why did you do take this deduction? Will a good answer be "Someone on a forum said that I could do it", or have the CPA you had assist with you handle any situation that arises. 

 What are you looking to accomplish here?

 Giving you the best advice to contact a CPA, take it or leave it

Originally posted by @Lionel Li :

Originally posted by @Stuart M.:
Originally posted by @Steven D.:
Originally posted by @Stuart M.:
Originally posted by @Jeff Filali:

I'm not a CPA, so not giving real tax advice... But I would think tools purchased to work on your rental property would qualify as business equipment and qualify for section 179 deduction.  But you really need to consult a CPA.

 I mean...I'm tryin here...

 I'm sorry but you are trying to get answers from a forum, not a qualified CPA. Yes there are very valuable resources here and qualified CPAs but they don't work for free. Get a reccommendation for a great real estate CPA in your area, sit down and have a chat with them. They will be able to answer your questions more accurately in an hour then hundreds of posts from a mix of amateurs to experts on a forum can do for you. 

 I think this is a pretty weird response to get on an open forum where thousands of people are sharing their knowledge on a diverse range of subjects for free but thank you for taking the time and contributing.

Would you give that answer to someone who asked about the 203k program? I mean, they could just read everything written by the FHA and figure out all the answers on their own, but its a shortcut to ask people who have already done so. And I guess people could say "I could tell you but I think you should pay someone to tell you instead" but i personally don't think that is the most friendly of responses.

I think people are just overwhelmed by accounting and the IRS, but I am not.  I just don't have the time to read the entire tax code to get answers to these relatively simple questions, just like everyone else here is doing with mortgage brokers, investors, etc.  I take time and answer questions, should I be charging people to share my knowledge and experience?

I don't think his response merits paragraphs about how much we're charging for advice but, that's really all you're getting on a forum, advice. Tax & Legal questions involves professionals who can tailor your situation to advise you, professionally. I think Steven gave you the right advice to seek a professional..also..I wouldn't compare investor or mortgage questions with tax questions. I'm an accountant but, I go to my CPA when I have my tax issues. Dealing with the IRS when it's not just a simple Income Tax Return is always a pain, hope you figure your situation out, people are just trying to steer you in the right direction.

 I don't think asking how to account for improvements to an asset in one year before it was placed into service the next year is really that complicated of a question for your average CPA.  But I guess I could be wrong, now I'm getting concerned that I'm going to have to find a top of the line CPA because this is way beyond what average CPA's seem to understand.

I was aware that I could pay someone for the answer, thank you for taking the time to respond.

I guess when I get the answer I will share it openly so that anyone in this situation can have the information they need.

Bear in mind that income taxation in the US is not a cookie cutter, one size fits all issue.  

When you work with your professional, you will find the solution that is correct for YOU.  Slight modification of facts and circumstances (so subtle you may not see it, but a talented CPA will) can, will and does alter the response.

Publishing YOUR answer does not mean you are publishing THE answer.

I think that you may have to find someone with intimate knowledge of the industry, however I don't think that you will need much of there time as it seems that you are willing to do most of the legwork yourself. You just need a few IRS law specific questions answered. It is a benefit to the community to share this information just in my (limited) experience tax situations seem to be so user specific it is difficult to apply them to many people or make any blank statements. Best of luck!

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