Tax help! deductions for EOY and no rental income yet to offset!

12 Replies

HI Friends! Was hoping someone with experience could help. I just bought two duplexes in Cleveland and will have work done to them, there will be many expenses I have for 2018 as I just started an LLC and besides rehab, and tons of fees, I will also have spent deductions on learning, travel as well. Problem is I will have no passive income yet to offset the loss. I also am a full time employee. Any idea on how to capitalize on some of these expenses before the new year rolls around?

Thanks in advance!

@Joanna Golden

Congrats on the property.

When you say how to capitalize, do you mean how to show That in the return? 

The way That will show up in the return as the depreciable basis of the House. You will depreciate the capitalized amout over The 27.5 years. 

You will definitely need a professional help. 


1) if you travelled after identifying the propery that you bought but before the purchase , that would be added to basis.

2) travel after buying the property might also need to be added to the basis, but there are some flexibility, and can be deducted.  

3) majority of  the work done before renting will be added to the basis. You might be able to deduct some expenses if  below the safe harbor threshold applies. 

If you make more than150k from w-2 , it might be better not to make a election and take deprecation over the 27.5 years because You can’t deduct rental losses against your w-2 anyway. Talk to your tax planner.

The money spend on education has to be carefully evaluated. If it was spent before acquiring the property, the tax Court has mentioned the best you can do is take a deduction as Startup expenses up to 5000 and capitalize and amortize the rest. Also needs to be discussed in detail with your professional.


@Joanna Golden

Definitely talk to your cpa. Some can be expenses that are written against w2 income or at least carry over to next year. let your accountant figure it out. You stay focused on what you are good at buying/rehabbing/renting etc. 

@Joanna Golden Deductibility of expenses revolves around the "in-service" date, which is tax talk for when the property is in a livable condition and advertised for rent.

Once the property is placed in service, operating expenses can be deducted in full, even if there isn’t any rental income just yet. Expenses incurred before the in-service date will likely be capitalized (added to basis) and depreciated over the life of the property.

It’s much more beneficial to deduct expenses in full as opposed to capitalizing and appreciating them, so it’s important to advertise the property as soon as possible.

Since you’re doing rehab work, it’s also  important to note the different tax treatment of expenses with respect to repairs and capital improvements.

These talking points should certainly be explored with a professional. I also commented on your other post – happy to chat if you’d like to discuss further.

Best of luck!

@Nicholas Aiola brings up the most valuable suggestion, although subtly.

"Deductibility of expenses revolves around the "in-service" date, which is tax talk for when the property is in a livable condition and advertised for rent."

As soon as property is livable, start advertising for rent.  Generally speaking advantageous tax treatment follows.

Assuming active participation and AGI is below phase-out, expensed items will reduce taxable income, which seems like mainly W-2 income.

Consult with your CPA/EA.

@Joanna Golden

Another consideration that you'll want to discuss with your CPA about is how this year's tax return will affect your ability to obtain financing next year.  If you claim a large loss on this year's return, while some of the deductions can be added back, others cannot be and will negatively affect your ability to obtain financing.

I would definitely talk to a tax accountant on this.  You will be able to use some expenses but without knowing all the facts I would opt to using that as something you can depreciate offsetting income for future years. 

Hi Joanna! I'd like to congratulate you, however, I may also pity you. It depends on where in Cleveland these places are!

You will be swimming in deductions once your business starts making money. You can usually carry this years losses against a later year's profits. I try to deduct as much as possible as soon as possible, which means capitalizing as little as possible.

My tax basis is so low, its almost unbelievable. Then when I sell, the tax man cometh with a vengeance. Sooner or later you have to pay..

@Joanna Golden the bad news is it sounds like no expenses to claim this year. In service requires the property to be move in ready and advertised. Some people disregard these rules, but that id tax fraud if you are audited. IRS problems are not worth a few dollars. Also acquisition costs like house hunting generally cannot be written off if you are not already in the rental business. As othets said the rehab costs will all be capitalized over 27.5 yeats. You need to hire a good CPA, this is not a DIY effort.