First rental property last year, how can I write off more than 5K

Tax, SDIRAs & Cost Segregation
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First rental property last year, how can I write off more than 5K

Jeff Howard
Edmond, OK · Member since 2013 · 78 posts · 6 votes

I bought my first rental property last year and I am trying to write off as much of the expenditures as I can.  We had a lot of expenses going in, closing costs, repairs, and improvements.  Our total expenses outside of house payments was over $15,000 including closing costs in 2017.

I am reading the book "Every Landlords Tax Deduction Guide" and am getting bewildered.  Here is my question...

I know I can write off up to $5000 in expenses for startup cost, but what about closing costs?  What about maintenance?  Can I write off maintenance over and above the $5000 limit?  Is the $5000 a free deduction off my 15K, and the rest I have to figure out how to justify?

I was told going in you can write off everything, now i am thinking that's not true?  

Help? I have searched and am reading that book, is there a good post someone can point me too?

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
8y

@Jeff Howard , 

If you had reached out last year, there might have been some room planning to make your expenses as deductible as possible. It is too late to plan, but I can tell you generally what happens, 

1) Honestly, there is not going to be much start-up cost with rentals. Even if there was, it might be limited because of the expenses for just investigating the market for individuals is treated are personal cost. 

2) We need the breakdown of the 15k to tell what goes where, but in general:

  • Most of the closing cost will be added to the basis of the property.   ( title fees, legal fees for prep the contract, recording fees, transfer taxes, title insurance, back taxes paid and others) 
  • All the improvements to the property will be added to the basis. ( unless you qualify for de minimus safe harbor of 2500) 
  • All the repairs done before placing the property in service is added to the basis. Anything after can be deducted the same year. 

If you are not sure how to handle the expenses, Please talk to qualified professional as you want to do this correctly and more beneficially in the future as well. 

Good luck 

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y
    Most closing costs (excluding taxes and insurance) along with repairs/renovations to make it “rent ready”, if vacant.....get added to your basis and depreciated, not expenses.
    1Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y

    @Jeff Howard , 

    If you had reached out last year, there might have been some room planning to make your expenses as deductible as possible. It is too late to plan, but I can tell you generally what happens, 

    1) Honestly, there is not going to be much start-up cost with rentals. Even if there was, it might be limited because of the expenses for just investigating the market for individuals is treated are personal cost. 

    2) We need the breakdown of the 15k to tell what goes where, but in general:

    • Most of the closing cost will be added to the basis of the property.   ( title fees, legal fees for prep the contract, recording fees, transfer taxes, title insurance, back taxes paid and others) 
    • All the improvements to the property will be added to the basis. ( unless you qualify for de minimus safe harbor of 2500) 
    • All the repairs done before placing the property in service is added to the basis. Anything after can be deducted the same year. 

    If you are not sure how to handle the expenses, Please talk to qualified professional as you want to do this correctly and more beneficially in the future as well. 

    Good luck 

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
    WebsiteView Page
    TaxMD™ | AI-Powered Tax Planning
    WebsiteView Page
    2Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    You are now operating a business, you need to get an accountant on your team to do your taxes.

    2Reply
  • Ihe O.
    Investor · Laurel, MD · Member since 2016 · 395 posts · 191 votes
    8y
    Originally posted by @Thomas S.:

    You are now operating a business, you need to get an accountant on your team to do your taxes.

     No he does not, especially with only one property. All of the advice he has gotten here was already available in the archives of this site.

    0Reply
  • Ihe O.
    Investor · Laurel, MD · Member since 2016 · 395 posts · 191 votes
    8y
    Originally posted by @Jeff Howard:

    I bought my first rental property last year and I am trying to write off as much of the expenditures as I can.  We had a lot of expenses going in, closing costs, repairs, and improvements.  Our total expenses outside of house payments was over $15,000 including closing costs in 2017.

    I am reading the book "Every Landlords Tax Deduction Guide" and am getting bewildered.  Here is my question...

    I know I can write off up to $5000 in expenses for startup cost, but what about closing costs?  What about maintenance?  Can I write off maintenance over and above the $5000 limit?  Is the $5000 a free deduction off my 15K, and the rest I have to figure out how to justify?

    I was told going in you can write off everything, now i am thinking that's not true?  

    Help? I have searched and am reading that book, is there a good post someone can point me too?

     I did my taxes with TurboTax Live which gave me live access to a CPA who would review in real time my return before filing and answer all those sorts of questions - cost to me $220 - a bit more than a book I admit.
    I

    1Reply
  • Jeff Howard
    OP
    Edmond, OK · Member since 2013 · 78 posts · 6 votes
    8y
    Originally posted by @Ashish Acharya:

    @Jeff Howard , 

    If you had reached out last year, there might have been some room planning to make your expenses as deductible as possible. It is too late to plan, but I can tell you generally what happens, 

    1) Honestly, there is not going to be much start-up cost with rentals. Even if there was, it might be limited because of the expenses for just investigating the market for individuals is treated are personal cost. 

    2) We need the breakdown of the 15k to tell what goes where, but in general:

    • Most of the closing cost will be added to the basis of the property.   ( title fees, legal fees for prep the contract, recording fees, transfer taxes, title insurance, back taxes paid and others) 
    • All the improvements to the property will be added to the basis. ( unless you qualify for de minimus safe harbor of 2500) 
    • All the repairs done before placing the property in service is added to the basis. Anything after can be deducted the same year. 

    If you are not sure how to handle the expenses, Please talk to qualified professional as you want to do this correctly and more beneficially in the future as well. 

    Good luck 

    Thanks for getting back to me, what would have been special about doing something last year? 

    We have roughly categories of cost…

    • 1.Closing Costs which include inspection fees
    • 2.Business expenses which include having signs made, creating an LLC, ordering a P.O. Box,
    • 3.We have costs for repairs we did before putting it on the market. Buying sod, plants, paint, mulch, toilet seats, fan, bunch of minor stuff.
    • 4.THEN we put it up for rent and started showing and accepting applications.  Over a few months we made the following improvements:
      • a.Bought a refrigerator
      • b.Installed a storm shelter
      • c.Tiled the master bath (was carpet)
      • d.Made several utility payments, gas, electric, city trash
    • 5.After the renters moved in
      • a.Several more minor repairs they found
      • b.AC went out but the repair did not improve the unit, it actually took away a feature and was 30% less than replacing the entire HVAC system
    • 6.Interest
    • 7.Travel miles to the unit.
    • 8.Bought a computer that I use 50% of the time for the business (researching more units, running my own business)

    Which of these can I reasonably deduct and which do I have to depreciate

    0Reply
  • Jeff Howard
    OP
    Edmond, OK · Member since 2013 · 78 posts · 6 votes
    8y
    Originally posted by @Ihe O.:
    Originally posted by @Jeff Howard:

    I bought my first rental property last year and I am trying to write off as much of the expenditures as I can.  We had a lot of expenses going in, closing costs, repairs, and improvements.  Our total expenses outside of house payments was over $15,000 including closing costs in 2017.

    I am reading the book "Every Landlords Tax Deduction Guide" and am getting bewildered.  Here is my question...

    I know I can write off up to $5000 in expenses for startup cost, but what about closing costs?  What about maintenance?  Can I write off maintenance over and above the $5000 limit?  Is the $5000 a free deduction off my 15K, and the rest I have to figure out how to justify?

    I was told going in you can write off everything, now i am thinking that's not true?  

    Help? I have searched and am reading that book, is there a good post someone can point me too?

     I did my taxes with TurboTax Live which gave me live access to a CPA who would review in real time my return before filing and answer all those sorts of questions - cost to me $220 - a bit more than a book I admit.
    I

    Thanks I might look into that.  This is the reason I did my taxes this weekend.  I have a few coaches I can reach out to, along with you guys.

    I really appreciate everyone's help on this site.

    0Reply
  • Cara Lonsdale
    Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    Turbo tax is awesome!  And Costco usually has a discount on it right around now.  The step by step process is great, and it will guide you through all the questions you are asking.

    0Reply
  • Jeff Howard
    OP
    Edmond, OK · Member since 2013 · 78 posts · 6 votes
    8y
    Originally posted by @Cara Lonsdale:

    Turbo tax is awesome!  And Costco usually has a discount on it right around now.  The step by step process is great, and it will guide you through all the questions you are asking.

    Actually I am using it, the premier version.  I just want to make sure I catch any strategies it misses.  I have found, pre-landlord days, that it tried to direct me away from a better strategy.

    0Reply
  • Cara Lonsdale
    Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Jeff Howard:
    Originally posted by @Cara Lonsdale:

    Turbo tax is awesome!  And Costco usually has a discount on it right around now.  The step by step process is great, and it will guide you through all the questions you are asking.

    Actually I am using it, the premier version.  I just want to make sure I catch any strategies it misses.  I have found, pre-landlord days, that it tried to direct me away from a better strategy.

     Does the premiere do business and rentals?  I know that I had to upgrade several years ago when they changed each of the levels.

    If the version you have isn't at the right level, it will skip over things that you may want to include.

    0Reply
  • Jeff Howard
    OP
    Edmond, OK · Member since 2013 · 78 posts · 6 votes
    8y

    Ok, I just went through the rental property section of turbo tax and it helped greatly.  A few questions I had after doing it?

    I have seen some sites that say I can write of origination costs and others that say I can't, that I have to amortize them over the life of the loan.  What is the correct answer?

    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    8y

    @Jeff Howard

    You have to write off the origination costs over the life of the loan.
    If it is a 15 year mortgage - you write it off over 15 years.

    And to answer your other questions

    Most closing costs are added to the basis of the building and depreciated over its useful life. However, there are some items paid at closing costs that are immediately expenses such as HOA fees, home owners insurance, pro-rated interest expense and pro-rated real estate taxes.

    You are not required to reach out to an accountant to do your return/provide strategies but it can save you time which can be spent on doing other things.

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