Deduct expenses in following year?

6 Replies

My partner and I are in the process of fixing a condo to start renting it for the first time next year. We've been doing all the work ourselves so far, relatively low cost stuff like painting and cleaning. We're now at the phase where we need to start spending some more significant money on things like toilets, new vanities, a new range. Do we have to wait another 10~ days to purchase these items in the new year in order to be able to claim them as business expenses for tax purposes? Obviously we could just wait until the new year to make these purchases but I have a W-2 job, so I was planning on doing a lot of work during the holiday break while I have the time. It would be a bummer to hold off on things just because of tax purposes.

*Not an accountant*, but pretty sure these will not classify as expenses.  My understanding is these will be added to the cost basis of the property, or capitalized and depreciated over several years.

@Roshan Taheri 1) Find a good CPA. 2) Start marketing/advertising the property for Rent ASAP. This can place the property into service as a rental. 3) Costs under Capital improvements can be deducted up to $2,500 if you make the proper election. 4) If you AGI is below $150K you could take a loss if the property was in service and the costs were incurred in 2017 (there are limits and phase outs). 5) Repairs are always deducted when incurred if the property has be placed in service. Capital improvements are capitalized and depreciated. 6) Document Document Document 7) I reiterate, find a good CPA. 

Updated 12 months ago

See if Linda is taking on clients.

@Jered Souder - you've got an interesting grasp of some issues at play here, but your interpretation may be a bit off base.

First of all, in general, the remodeling costs associated with getting a property ready for the first tenant are not going to be deductible - not based on what the OP has described.  This is some significant work (remodeling bathrooms and the like goes beyond just a bit of touch up paint, a good cleaning and changing the locks).

Therefore, all of these expenses will be added to the basis and depreciated along with the purchase price of the house.  There are some other details here, but beyond the scope of this post.  

What you are confusing, Jered, is the De Minimum Safe Harbor rule which indicates that you can elect to treat line item expenses less than $2500 as an expense instead of capitalizing and depreciating.  But the property must already have been "in service" to elect this.  The fix up costs prior to going in service are not eligible for this.

But you might say "Linda, that's why I said they should advertise it.  It is the magic cure for proving your property is in service".  Kinda, but not really.  In order to be considered "in service", the asset must be ready for and available for service immediately.  Advertising it doesn't fix that.  The property must be habitable, for one thing.  If the bathroom remodel they are doing is the only bathroom, then the property isn't habitable if the toilets and sinks are in the process of being replaced.  Secondly, if they advertise and a tenants says "great, I'll move in today!" would the OP actually allow that while they're still remodeling?  If so, then they might be able to make a case that the asset is in service.  If they would say "no, you can move in next week when we're done putting in the new toilet", then that pretty much torpedoes that whole thing.

The last thing I would advise is, when offering tax advice, you should probably not use words like "always" or "never".  Taxes just aren't that cut and dried and offering that kind of advice can really run somebody afoul of the laws or put them at a disadvantage.  Almost everything within the IRS code is subject to a "Facts and Circumstances" test.  What is true for you may not be true for others.

Linda covered pretty much everything in her post.

@Linda Weygant , Thanks for clarifying my sloppy post . In service is the key to destructibility not 12/31/17 vs 1/1/18. That was my point which got lost in the sloppiness. So waiting until next year, like you mentioned doing, alone does not solve your problem. I assumed that you make making cosmetic enhancements, ie paint, vanity, toilet range (~1K). If you are in the midst of a 10K remodel then I was off base as Linda is correct that advertising alone does not make a property in service. 

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