Tax Questions - from the First Time Homebuyer
With tax season around, I'm sure there are others scrambling for answers to their tax benefits. I have interviewed a few tax accountants and have one in mind. But, I'm trying to arm myself with some tax knowledge so I can review his return.
Prior to buying a first home, we generally have expenses such as consulting a guru, attending RE conferences, buying education books or incurring plane/meal/hotel expenses to visit properties (assuming the trip was pre-planned with R/E business in mind).
In my case, I had those expenses, plus performed inspections of a property that I ended up not buying. But, a few months later, I did buy a place in the same city.
I’m curious as to whether and how the expenses above can be expensed or capitalized. For reference, expensing = decreasing your passive income now to pay lower taxes now. Capitalizing = decreasing your passive income over time to pay lower taxes over time.
It seems the IRS categorizes expenses associated with acquisition of real property as (i) investigatory, (ii) facilitative, or (iii) incurred before placing the rental in service.
(i) Facilitative = Capitalized Expenses
Examples: Application Fees, finder fees, home inspections, broker/appraiser fees and others listed under 1.263(a)-1(d) - for those who want a comprehensive list
(ii) Investigatory are expenses to help determine "whether or which" properties to buy. They must NOT be facilitative expenses and can be expensed immediately.
(iii) Incurred before placing the rental in service.
Examples: repainting walls, refinishing floors, etc. Things that are thought to normally be expensed because they seem repair costs, are instead added to the basis of the property if it was incurred prior to placing building.
Source: https://keitercpa.com/wp-content/uploads/2012/02/C...
Putting the above read to practice, would this be an appropriate conclusion?
1. Expenses for consulting, attending R/E and travel expenses such as plane, meal and lodging to check out a property, educational expenses can be immediately expensed. Meals can only be deducted at 50%, while the rest at 100%. (input in 1040 Schedule C)
2. Inspections performed for a property that I ended up not buying can be added to the basis of the property that I bought later in the year. This was a tricky one. I'm surprised that inspection costs for one property can be transferred as basis for another property. After asking a few tax accountants and reading on BP, that seems to the conclusion. Anyone know why or can point to some rule?