Treatment of Remodel Costs After Leased on New Acquisition

4 Replies

Good morning all... I purchased a residential property for a long term corporate client in November 2017.  The client asked for some remodel work to be done and expects to move in on March 1 2018.  It's pretty significant, let's say $20,000.  Typically the "in-service" date is when it's advertised for rent - in this case, it's leased but they aren't moved in yet. How would you treat the remodel costs (and depreciation/in-service date for the property) for you 2017 tax return?  

Thanks

Originally posted by @Joe Taylor :

Good morning all... I purchased a residential property for a long term corporate client in November 2017.  The client asked for some remodel work to be done and expects to move in on March 1 2018.  It's pretty significant, let's say $20,000.  Typically the "in-service" date is when it's advertised for rent - in this case, it's leased but they aren't moved in yet. How would you treat the remodel costs (and depreciation/in-service date for the property) for you 2017 tax return?  

Thanks

Joe, 

The following elements must be proved with respect to an unit before it is considered placed in service:

  • 1) Readiness
  • 2) Availability 
  • 3) Capability to perform its intended function
  • Depreciation starts when you placed the property in service. It can be before the lease was signed when the property was advertised and was available. If you never advertised and you found the tenent and signed lease after you bought, you can use the lease date to determine the placed in service date.

    If the leased is already signed and asset is considered placed in service  the repair works can be deducted.

     Improvement has to be capitalized. Not all improvements have to be capitalized though, there is a safe harbor rule where you can expense everything below 2500 per unit of property. 

    Originally posted by @Ashish Acharya :
    Originally posted by @Joe Taylor:

     Improvement has to be capitalized. Not all improvements have to be capitalized though, there is a safe harbor rule where you can expense everything below 2500 per unit of property. 

    Thanks for the reply. Where I get nervous is using the safe harbor $2,500 per unit of property, and those all together sum to a large amount, say $20,000 to $30,000 on a SFR that generated only $10,000 in income that year. Seems like that would raise a flag to expense that much. I guess with my receipts I'd have a defensible position. Thoughts?

    Thanks again.


     Improvement has to be capitalized. Not all improvements have to be capitalized though, there is a safe harbor rule where you can expense everything below 2500 per unit of property. 

    I am reading on the safe harbor rule, and it appears quite limited in it's application.

    To take this election:

    • Your gross receipts, including all your other income, are $10,000,000 or less.
    • Your eligible building has an unadjusted basis of $1,000,000 or less.
    • The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits:
      • 2% of the unadjusted basis of your building or
      • $10,000

    The hangup I have is 2% of the building's basis. Let's say the building is $100K to $200K range, after only $4,000 in repairs or improvements I am disqualified from using the safe harbor rule on that property. Do you agree?

    Originally posted by @Joe Taylor :

     Improvement has to be capitalized. Not all improvements have to be capitalized though, there is a safe harbor rule where you can expense everything below 2500 per unit of property. 

    I am reading on the safe harbor rule, and it appears quite limited in it's application.

    To take this election:

    • Your gross receipts, including all your other income, are $10,000,000 or less.
    • Your eligible building has an unadjusted basis of $1,000,000 or less.
    • The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits:
      • 2% of the unadjusted basis of your building or
      • $10,000

    The hangup I have is 2% of the building's basis. Let's say the building is $100K to $200K range, after only $4,000 in repairs or improvements I am disqualified from using the safe harbor rule on that property. Do you agree?

     Yes, that is also correct. 

    Regarding, not all the improvements will qualify for De minimis safe harbor rule though. So entire 30k will not be expensed. and what ever is expensed, if you have an invoice to support it there is no issue. 

    UOP: For the tangible property capitalization rules, the UOP for assets other than buildings generally consists of all the components that are functionally interdependent (i.e., where placing in service of one component is dependent on the placing in service of other component(s)).

     The UOP for a building generally is the building and its structural components (Door, windows, plumbing, wiring, etc). thus these will not be expensed under the safe harbor because the UOP is entire building. 

    The safe harbor applies to amounts paid during the tax year to acquire or produce what the regs call a “unit of property” (UOP), you must meet these requirements:

    • (1) at the beginning of the tax year, the taxpayer has written accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount (which will be 2500 for you), or with an economic useful life of 12 months or less;.
    • (2) the taxpayer treats the amount paid for the property as an expense on its books and records in accordance with its accounting procedures. ( do this on your bookkeeping software or whatever you utilize)
    • (3) the amount paid for the UOP doesn't exceed $2,500. as substantiated by invoice
    • Note: The cost for the Unit of Property includes l additional costs (for example, delivery fees, installation services, or similar costs) if these additional costs are included on the same invoice with the tangible property.

    Eg:

    A purchases 100 printers at $500 each for a total cost of $500,000 as indicated by the invoice. Assume that each printer is a unit of property under §1.263(a)-3(e). A has accounting procedures in place at the beginning of Year to expense amounts paid for property costing less than $2500, and A treats the amounts paid for the printers as an expense on its books and records. The amounts paid for the printers meet the requirements for the de minimis safe harbor.

    Join the Largest Real Estate Investing Community

    Basic membership is free, forever.