Tax question: Incur rehab costs before or after Jan 1st?

3 Replies

I'm currently undergoing a renovation on a 2-family I purchased a couple of weeks ago. I anticipate the renovation to last past the new year, and will include items like painting, refinishing floors, new kitchens and baths. What type of items/work (if any) can I deduct from my taxes, and considering I won't have rental income until after January 1st, is it better to defer more of these costs into the new year?

Thanks!

Julie

In general, tax law states that you don't deduct *any* remodel expenses until the property is put into service.  At that point, you accumulate those expenses and add them to the basis.  You then depreciate it all over the next 27.5 years (along with the purchase basis).

Originally posted by @Julie Halloran :

I'm currently undergoing a renovation on a 2-family I purchased a couple of weeks ago. I anticipate the renovation to last past the new year, and will include items like painting, refinishing floors, new kitchens and baths. What type of items/work (if any) can I deduct from my taxes, and considering I won't have rental income until after January 1st, is it better to defer more of these costs into the new year?

Thanks!

Julie

It sounds like most of your expenses will need to be capitalized, unless you are able to place the property "in service" this year. In that case, some expenses might be deductible. Check with your CPA as they should advise you accordingly.

@Julie Halloran

Julie, your question has 3 parts.

1. Can you deduct some expenses? The answer is maybe, if your major renovations are finished this year and the property (at least one unit) is rentable before 12/31 and placed on the market. Even if things like painting are not finished, and the tenant is not in place.

2. Is it helpful? Depending on your overall financial situation, claiming deductions against zero rent may or may not reduce your taxes.

3. Should you? Even if you can reduce your taxes this year, it may not be the best option. Ideally, need to look into the next year and see if it's more beneficial next year. Also, expenses against zero income is an audit flag.

If you do decide to claim some expenses in 2017, then a careful planning of the rehab is due. Things like timing, itemizing and separating jobs can make a difference.

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