CPA - HELP! TAX planning questions for BRRRR

4 Replies

I am starting to do my tax planning for the year....ERRRR

I am trying to figure out how much I can deduct from a BRRR project.

I am not clear on the de minims vs 179 vs bonus depreciation vs 27.5 years depreciation 

My goal is to take as much this year as I can.  Further, I also want to limit my future recapture depreciation when I sell the property.

If I under stand de minims correctly, I can take up to $2500 per invoice (non Applicable Financial statement).  Subject to the lesser of 2% basis or 10k.  

i.e.  100k basis = 2k deduction.- Does this have to be recaptured upon sale?  

IRS link.

A de minimis safe harbor election

179 - Can I use this for my appliances.  Is there anything else I can take as a deduction?  

Paint can be capitalized in the year completed

Flooring - Other than carpet it has to be depreciated 27.5?  Could this be de minims?

A/C - has to be depreciated over 27.5?  could this be minims?

Can I user ARV to set my basis for the 27.5 year depreciation of the building? Do I need to back out all the improvement costs? In theory my basis should still be higher than my acquisition cost.

The refi will be easier to plan for, I am not sure if it will make this tax year.

@Lesley Resnick

You might have huge loss if you expense everything this year. Depending on your AGI it might not be helpful. I am guessing you qualify for RE pro status so that you can claim all the loss, so you are willing to expense everything.

If I understand de minims correctly, I can take up to $2500 per invoice (non Applicable Financial statement). Subject to the lesser of 2% basis or 10k.

Answer: You are combining two different safe harbors. 2% or 10k is called the Small Taxpayer Safe harbor. This will not apply to you as you rehab is going to be greater than 10k.

Also remember, depending on when you have deemed to place an asset in service, it is tricky to claim de minims safe harbor. There are two school of thoughts here in BP. I lean towards taking an election for work done to your BRRRR property. But it is always beneficial to do minimum amount of work to get the house rent ready, advertise it and start depreciation. And then do required repairs. This way you have better defense against deduction of work done to the property.

So, it’s better to advertise as soon as the house is rentable and do minor work such as panting and other repairs so we have better grounds for deducting it.

179- Can I use this for my appliances? Is there anything else I can take as a deduction?

Answer: 179 has income limitation and you will not be able to take it anyway. You need to have net income to elect 179 which with all the deducting , you might not. You can elect bonus depreciation on the appliance. I would wait to buy until you advertise and start depreciation of the building to elect bonus. If not, there might be an argument that all the work done is before you are placing asset in service and needs to be capitalized. Yes you could take de minims but there are two schools of thoughts.

Paint can be capitalized in the year completed

Answer- This can be deducted

Flooring - Other than carpet it has to be depreciated 27.5? Could this be de minims?

Answer- Can be de minims. To have better chance to expense this, I would wait until rent-able and change the flooring. If you expect the cost is going to be more than 2500, you can change it anytime because it does not qualify for de minims.

A/C - has to be depreciated over 27.5? Could this be minims?

Answer- Can be de minims. To have better chance to expense this, I would wait until rent-able and change the AC. If you expect the cost is going to be more than 2500, you can change it anytime because it does not qualify for de minims.

Can I user ARV to set my basis for the 27.5 year depreciation of the building? Do I need to back out all the improvement costs? In theory my basis should still be higher than my acquisition cost.

Answer -You cannot use ARV. Your basis will be your purchase price plus all the thing you capitalized (can't take into account the de minims expenses). Make sure you take out value of land too.

The refi will be easier to plan for, I am not sure if it will make this tax year.

Answer- Refi has no tax implication, so you are good. Some of the expense during refi might be deductible. 

Generally speaking, the order should be:

(1) Expense everything possible under the tangible property regs.

(2) Expense under S179 if net income available and not phased out.

(3) Bonus depreciation as necessary to get to (or as close as possible to) a tax loss.

However OP is in Florida and I'm assuming the property is in Florida held either directly, in a disregarded entity, or a partnership.  To her, it makes less difference as there's no state income tax return in which state tax law decoupling from federal law becomes an issue.

Florida has decoupled from S179 and bonus the last time I checked, but only C Corp returns are required, and S Corp returns in very limited situations.

As always, speak with your tax CPA/EA who knows your facts and circumstances.

Thanks for all the great info.
Just to summarize:

1.  I am  RE pro and want all the deductions, I am entitled to take.  My AGI would benefit.
2.  The properties went into service the day after they were purchased signs were posted offering them.
3.  Bonus Deprecation is my play.  Anything that has under a 20 year life.
4.   Paint is deductible
5.  Floor could be de minims.  Is de minims one time or can it be taken every year?
6.  Basis = purchase + capitalized costs.  Will I end up with 2 schedules since the original building goes into service before the work?
7.  Refi - Points and fees associated with transaction
   
Thanks for your help!


Originally posted by @Ashish Acharya :

@Lesley Resnick

You might have huge loss if you expense everything this year. Depending on your AGI it might not be helpful. I am guessing you qualify for RE pro status so that you can claim all the loss, so you are willing to expense everything.

If I understand de minims correctly, I can take up to $2500 per invoice (non Applicable Financial statement). Subject to the lesser of 2% basis or 10k.

Answer: You are combining two different safe harbors. 2% or 10k is called the Small Taxpayer Safe harbor. This will not apply to you as you rehab is going to be greater than 10k.

Also remember, depending on when you have deemed to place an asset in service, it is tricky to claim de minims safe harbor. There are two school of thoughts here in BP. I lean towards taking an election for work done to your BRRRR property. But it is always beneficial to do minimum amount of work to get the house rent ready, advertise it and start depreciation. And then do required repairs. This way you have better defense against deduction of work done to the property.

So, it’s better to advertise as soon as the house is rentable and do minor work such as panting and other repairs so we have better grounds for deducting it.

179- Can I use this for my appliances? Is there anything else I can take as a deduction?

Answer: 179 has income limitation and you will not be able to take it anyway. You need to have net income to elect 179 which with all the deducting , you might not. You can elect bonus depreciation on the appliance. I would wait to buy until you advertise and start depreciation of the building to elect bonus. If not, there might be an argument that all the work done is before you are placing asset in service and needs to be capitalized. Yes you could take de minims but there are two schools of thoughts.

Paint can be capitalized in the year completed

Answer- This can be deducted

Flooring - Other than carpet it has to be depreciated 27.5? Could this be de minims?

Answer- Can be de minims. To have better chance to expense this, I would wait until rent-able and change the flooring. If you expect the cost is going to be more than 2500, you can change it anytime because it does not qualify for de minims.

A/C - has to be depreciated over 27.5? Could this be minims?

Answer- Can be de minims. To have better chance to expense this, I would wait until rent-able and change the AC. If you expect the cost is going to be more than 2500, you can change it anytime because it does not qualify for de minims.

Can I user ARV to set my basis for the 27.5 year depreciation of the building? Do I need to back out all the improvement costs? In theory my basis should still be higher than my acquisition cost.

Answer -You cannot use ARV. Your basis will be your purchase price plus all the thing you capitalized (can't take into account the de minims expenses). Make sure you take out value of land too.

The refi will be easier to plan for, I am not sure if it will make this tax year.

Answer- Refi has no tax implication, so you are good. Some of the expense during refi might be deductible. 

Just to set the record straight, it is "de minimis" and not "de minims".

"Is de minims one time or can it be taken every year?"

The de minimis safe harbor is an election under Treas Reg Sec 1.263(a)-1(f) that must be made every year with a timely filed tax return, including extensions.

"Will I end up with 2 schedules since the original building goes into service before the work?"

You can dump all the costs into one account sure, but on your depreciation schedule (usually kept by your tax CPA/EA) yes, the betterments, adaptions, and restorations will be put into service after the initial building, assuming they must be capitalized.

It should be noted that when you refi loan costs won't provide an immediate tax benefit.  They are amortizable over the life of the loan.