Improvements before or after “in service”?

3 Replies

Hi I’m closing on a duplex next week. I’d like to replace the siding with vinyl. What different tax implications might there be if I do this before I place tenants, or after, when it is “in service”? I’d obviously like to have this in place so the house will show better, but I don’t want to miss out on any tax savings. Thank you

Hi @Daniel C. ,

It is in service once you hold the duplex out for rent.  That can be before tenants are actually placed, but you must be prepared to actually place tenants at that point.

If the work is done before the tenants are placed, you simply have to wait until it is "in service" to begin depreciating it.  If the work is done after the tenants are placed, it is already in service so you would begin depreciating it immediately.

Without looking at the the costs of replacing the siding with vinyl (and other costs relating to the property), I am going to make the assumption that the work does not qualify for any of the safe harbors under the repair regulations and thus would have to be capitalized.  Therefore, as long as everything is done in the same tax year the actual tax differences in the timing of the work is minimal.

@Daniel C.

Generally, Improvements are always added to the basis of the property no matter when you do them before or after placing in service ( unless you qualify for the safe harbors). 

Replacing the vinyl will rarely qualify because I am sure it will be greater than 

1) Lesser of 2% of your basis in the property or $10k  for a small taxpayer safe harbor. 

2)  a $2500 to qualify for a de minimis safe harbor, if replacing would qualify, usually not being a structural component of a building.