Hello, We are a property managing company that rehabs and rents our own properties. I am confused when I comes to the categorization of some items. First Repairs/Maintenance and capital expense, from what I found around on the internet when you are doing a rehab/project all of the expenses from those are capital expenses. So basically anything that involves making the place look nice and a water heater replacement would be a capital expenses not a repair/maintenance category, thanks.
I leave it to my accountant but a rehab is like building a new building thus your summary above is generally correct.
After the property is in service then “repairs” can be maintenance items. Lawn care, snow removal, drywall patches, etc are expenses deductible in the year made. Capital expenditures are deductible over time in the depreciation calculations. There are many ways to do depreciation so I let my accountant figure the best way. I hope this helps.
@Matthew W. Any repairs done before the property is placed in service are capitalized. Any repairs other than routine maintenance done after the property is placed in service is subject to capitalization rule, which is to capitalize the payment if it prolongs the life of the asset or improves its value. However, you also have the option to elect to use the de minimis safe harbor rule to make it more simple. Per IRS, the de minimis safe harbor is simply an administrative convenience that generally allows you to elect to deduct small-dollar expenditures for the acquisition or production of property that otherwise must be capitalized under the general rules.
Consult with your CPA for property guidance!
I think what you are trying to determine/calculate is whether an item is expensed in the current year or capitalized and depreciated over its useful life.
There are court case and interpretations whether items are currently expensed or capitalized.
Items that generally replace an asset, improve an asset, extend an asset's useful life, make an asset more efficient normally are capitalized.
However, another thing to be cognizant about is that there are certain exceptions to expense items that would normally be capitalized as a result of the repair regulations passed 2-3 years ago.
If you are preparing the books based on tax basis - you may be better off hiring a bookkeeper or providing notes to your accountant as he prepared your return.
Hello, thanks for your insight this part can be very confusing at times and we aren't getting to much from our CPA. Anyhow we have 16 properties all self owned and managed and we also do our own rehabs and upgrades in the units. I use a software called Expenify.com for which I track all expenses. So far I have adding and removing different categories trying to get if perfect. As for repairs/maintenance I have this all in the same category but my main confusion has been recently when I heard of Capital Expense and that rehabs, upgrades, water heaters and anything that impoves the property is in the category with that being said we do no have anyone doing our books, we recently for added QB and using Expenify.com to track all of the receipts.
My main question is, Should I keep the records of all of the upgrades, projects, remodels with Repairs/maintenance or should I keep them in separate categories (Capital Expenses)? Also to what degree do I put records with in different categories? Thank you for the help on this. I want to add I have no problem hiring out someone to help set these categories up, if that will make it more sounded and organized.
@Matthew W. Always, always, always keep records of everything that happens pertaining to your properties. As others have stated, there are hard rules as to when an expense is definitely a Capital Expenditure/Improvement and when it is a repair/maintenance expense. It is also worth mentioning that some of these "hard rules" have exceptions that can fundamentally change your accounting and tax liability. Filing expenses in Capital Expenditures vs. Repairs/Maintenance isn't something that is decided on a whim or with a percentage rule in mind, it's closely monitored. Definitely consult with a real estate savvy bookkeeper or tax accountant.
See what worries me even more is I don't trust the CPA with recently hired. He says to put all the repairs, maintenance, and all other building projects, etc. in the same category. With using Expenify.com I guess I am trying to figure out if I should use Capital Expense category and a Repairs/maintenance category. If that is the case would a water heater be then a capital expense? Kitchen/bathroom rehab I figured would go in this category. Our CPA is very light on information when asked, because in the end he wants to be an all service for use with a very heavy cost. After this tax year I will be in search for another.
If your past tax returns have maxxed or nearly maxxed the net passive loss allowance on your 1040, I suspect there is no advantage to be gained from expensing some otherwise depreciable items. If this is your situation, you may want to consider just depreciating everything that would have normally been depreciated before the new safe harbor rules were enacted.
So I think I understand to take cost of materials and labor to a Capital Expense category. Now let me ask about repairs and maintenance, would these also be in two different categories or should I continue to but in one category?
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