Do all expenses need to be capiltaized before "placed in service"

7 Replies

I have a rental I purchased in September 2017.  It needed substantial rehab and it will be ready for rent later this month.  My understanding is that all expenses and improvements must be added to the basis.   I understand the big items and improvements would need to be but things like the water and sewer bill and electric bill?  Would I just need to add up all expenses no matter what they are for and add them to the basis?  I also understand the taxes can be written off on Schedule A, but if I won't itemize for 2017 tax year can I also add those to the cost basis as well so that I can get the deduction later on through depreciation?  Any insight would be much appreciated!  Thanks!

I believe every dime you spend during renovation, including holding costs, is added to cost basis until the date the property is placed “ in service.” Except maybe mileage. But you need to refer to either an IRS pub or a tax book like jd Lassiter or a nolo book...the ones that have been around forever. I photocopied the advice I used my first property and put it in my tax file. You will likely get good advice here but it appears a lot of people hire accountants so may not really know...eg., my husband is a consultant but has never done the taxes so might not give the best advice on schedule c.

@Chris F.

I record all my expenses in QBs and my CPA figures what is capitalized and what is maintenance. Maintenance items are usually deductions for the year incurred and capitalized items are depreciated over time. Utilities are deducted as recurring expenses annually. 

I believe taxes, mortgage interest, utilities,etc are deductible in year incurred and not added to basis but  @Michael Plaks , @Brandon Hall , and @Lance Lvovsky can answer your question easily. 

Originally posted by @Chris F. :

I have a rental I purchased in September 2017.  It needed substantial rehab and it will be ready for rent later this month.  My understanding is that all expenses and improvements must be added to the basis.   I understand the big items and improvements would need to be but things like the water and sewer bill and electric bill?  Would I just need to add up all expenses no matter what they are for and add them to the basis?  I also understand the taxes can be written off on Schedule A, but if I won't itemize for 2017 tax year can I also add those to the cost basis as well so that I can get the deduction later on through depreciation?  Any insight would be much appreciated!  Thanks!

The property taxes on a rental do not go on Schedule A. They would go on Schedule E (assuming not owned by a separate entity).

@Chris F.

Everything specifically related to the property (acquisition, rehab, interest, taxes, insurance, utilities, etc.) gets capitalized into basis until the property is placed in service  - which is this year. So, no deductions in 2017.

If you had other in-service properties in 2017, then you may deduct business overhead expenses like education, driving etc. If this is your first property, then even those expenses are capitalized.

Thanks for the replies everyone! Looks like I’ll need to capitalize all the expenses for the rental. I do have another rental currently in service so maybe I can get some of the mileage back for 2017 taxes.

To @Chris F. 's situation, which I find myself in as well.... I understand all expenses will be added to the cost basis with a service start date in 2018, but do you still file a Schedule E for the building in 2017 to record when the expenses happened and write in "0 Fair Rental Days" to denote it was not in service for all of 2017?

Originally posted by @Matthew Jonas :

To @Chris F. 's situation, which I find myself in as well.... I understand all expenses will be added to the cost basis with a service start date in 2018, but do you still file a Schedule E for the building in 2017 to record when the expenses happened and write in "0 Fair Rental Days" to denote it was not in service for all of 2017?

No. The property essentially does not exist for the IRS until placed in service.

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