The recent article regarding BARRRR is very interesting written by Brandon Hall. One question I had in mind if anyone could answer is what would be considered as "In-service" for 2-4 units. If I had a duplex and one unit was occupied, and I was fixing up the other vacant unit. Would the whole property be considered as "In service" so I could write off most of the updates in the vacant unit as "operational cost" instead of depreciating it? Or would the IRS try to separate it, saying that the vacant unit was not advertised, and therefore is not in service?

Hi Daniel - glad you enjoyed!

For a duplex, the majority of the repairs you make will be capital expenditures (added to the basis of the property) and will be depreciated, liked over a 27.5 year period. This is true regardless of the date you advertise the property for rent. However, you should advertise the property for rent early on (or midway through) the rehab in order to provide your tax pro with the potential flexibility to deduct some of the costs incurred. 

As always, don't implement this without the support of a tax pro or you're asking for trouble. 

@Brandon Hall thanks for the great article.

Any way to write off land:):):)...only way I figure that out is to give it away!

@John Thedford you can't write off land nor depreciate it. Building basis only!

Originally posted by @Brandon Hall :

@John Thedford you can't write off land nor depreciate it. Building basis only!

 Yes sir I am well aware of that...didn't you see the grins behind the question?
Anyways, thanks for the article. I just checked my books to make sure I have everything segregated properly for my CPA. I need all the legitimate writeoffs I can get. The more RE I am buying the higher my income.  All in all that is not a bad thing.

I do have one question though: how did the IRS come up with nice even numbers of 27,5 years for residential?

Originally posted by @Brandon Hall :

Hi Daniel - glad you enjoyed!

For a duplex, the majority of the repairs you make will be capital expenditures (added to the basis of the property) and will be depreciated, liked over a 27.5 year period. This is true regardless of the date you advertise the property for rent. However, you should advertise the property for rent early on (or midway through) the rehab in order to provide your tax pro with the potential flexibility to deduct some of the costs incurred. 

As always, don't implement this without the support of a tax pro or you're asking for trouble. 

 Hi Brandon,

Appreciate the reply. So the example you used in your article was more specific for a SFR?

Definitely will talk to my CPA about all this, but just want to gain some additional knowledge before the conservation. I could probably spend a few hours just talking about tax strategies...that's normal, right?

@John Thedford I did :) Just in "CPA mode" hah!

@Brandon Hall

I read your blog. No doubt some investors are going to read it and wonder REALLY?
Here is a scenario. I purchased a rental last year. I leased it back to the seller for a year. It was in terrible shape on the interior. Her lease expired, and I decided to move on with different tenants and hopefully a higher rate. I put several thousand into new flooring. So, my question is: are you saying this can be expensed rather than depreciated? It was quite a bit of money. Maybe I missed something in your blog because I skimmed over it quickly. 

@John Thedford I'm saying it should be scrutinized by you and your tax pro. Too many tax pros simply pass it off as capex when that may not be the case. So I'm not saying you can definitely deduct it, but I am saying you should take a closer look at it.

Correct me if I'm wrong here, but my understanding is that this only applies if the property is purchased vacant. If the property is purchased occupied and then vacated the repairs/updates are subject to the over/under $2500 rule. Again, not a CPA, but that is how its was explained to me by my accountant.

Over/under $2500 rule? now I need to look up another term? hehe.

Is this a cut-off for CapEx?

Kirk

@Frederick Kirk Wendel Yes, single tickets below $2500 are considered maintenance (direct write off), over $2500 is cap ex (depreciated)... At least that's how my accountant has me separate my books. That amount has changed at least once in the last few years and I'd imagine its subject to a lot of factors that I don't know or understand, but that's the last number I was given and the way my accountant has me work my books.

This info may help.

https://www.forbes.com/sites/anthonynitti/2015/11/24/irs-taxpayers-may-immediately-deduct-the-purchase-of-assets-costing-less-than-2500/#4171b1f93be7

"De Minimis Safe Harbor: Under IRS Regulation Section 1.263(a)-1(f), landlords can deduct a wide variety of low-cost personal property items used in their real estate enterprise–even if the item would normally be considered an improvement rather than a repair. In this context, the term ‘personal property’ refers to pretty much anything in the property that’s not permanently attached to the dwelling. One common example: appliances. Most landlords can deduct such items, up to $2500 per item–up to a cap of 2 percent of the annual rental cost for the property."