Tax Question.. If I have more expenses/deductions than income...

5 Replies

If I make $10,000 in rent this year, but have $15,000 in expenses/deductions due to rehabbing, do I get some sort of tax credit for the $5000 that I’m upside down on? How does that work?

@Dustin Moore  

To better help you, we need this information: 

  1. Breakdown of the $15000. 
  2. When were these expenses incurred? before you advertised the property for rent or after?
  3. Does this 15000 include depreciation deduction?

@Dustin Moore , we'd also need to know how much you make outside of your rental properties (assuming these entities are reported on Schedule E of your individual tax return and are not in some other entity).

Why would it matter before or after advertising?

Originally posted by @Matt Bode :

Why would it matter before or after advertising?

 Rehab expenses incurred to a rental prior to it being ready for its intended use is added to basis. While rehab expenses incurred to the rental after it is ready to be rented are either expensed/capitalized depending on facts/circumstances.

Originally posted by @Matt Bode :

Why would it matter before or after advertising?

 The general rule is that 'repairs' are operating expenses. Operating expenses can be deducted in the year they are paid. However, you don't have operating expenses until your property is 'placed in service'. Your property is 'placed in service' when it is ready (i.e. inhabitable) and held out for rent (i.e. advertised). 

Work done on a property before it is 'placed in service' (advertised) is not an operating expense. Instead of deducting the costs in the year they are paid you must capitalize them - which means you add them to the cost basis of your property and depreciate them for the next 27.5 years. 

There are many caveats and exceptions to what I wrote above, which is why a competent tax professional can provide value at tax time (and all year long).

Best of Luck with Your Real Estate Investing!

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