How are Renovators planning for Taxes W new Apartment improve

Question

Hi for those of you who do major value add apartments how do you expense most of these things.  I've heard on first year purchase you can expense 100% or some say only 50% for bonus or accelerating depreciation?

Section 178

Bonus Depreciation differnt from accelerating depreciation?

Are there other benefits to deferring in first year major improvements?

Do people purposeley buy in January 2019 so they can have the WHOLE first year to write off improvements instead of December closing which would just be a few days of 2018

Could we expense major rehab improvements like Roof, Plumbing, Heaters, Windows first year?  What are pros and cons of accelerating or doing bonus depreciation

For instance if we had a $1,000,000 property that we have $100,000 in first year expenses for improving property can we accelerate them all the first year?  And what amount could we write off just $50,000?

Basit Siddiqi · Answer

@Susan O.If you are spending approximately $1,800,000 on the building, you may want to consider getting a cost segregation study. However, you should reach out to your accountant to see if it will be beneficial. The cost segregation analysis will break down the $1,800,000 into different buckets like building, land, improvements, etcYou mention "we'; who is we? are you purchasing this project with other investors?Whether the roof/improvements/appliance can be expensed/capitalized(or eligible for de minimis exception) depends on several factors. Is the item being repaired/replaced/improve efficiency. It also depends on the cost on the invoice for each item. if you are spending close to $2,000,000 on a project; you should spend some time and money speaking with a professional.

Eamonn McElroy · Answer

@Susan O.

Appliances, carpets = 5 years

Fences, landscaping, other land improvements = 15 years

Any property with a class life less than 20 years can be 100% bonused under the TCJA.  If the property is already in service, the de minimis safe habor should be aggressively used to expense any tangible property less than $2,500.

Who told you that kitchens and floors are 7 years and that a roof is 15 years?  What is 3 year property in a rental?  Windows over "X" years?

Is your accountant not able to provide education/value in this area?

Basit Siddiqi · Answer

@Susan O.Your accountant's software should be able to rollover the depreciable basis of property you own every year.

Susan O. · Answer

We plan to spend $125k on imporvements

$30,000 roof

$2-8,000/ unit improvments Floors, Kitchens, Appliances,

$3,000/ unit heating x 5 units

Building cost is $1.8 m and gross income is $200,000.  NOI is aproximatley  125,000

Do you know which can be expensed using bonus and which can be expensed using 179

Other investors I've talked to said their accountants accelerated the deprecion through cost segregation on all appliances, fixtures, floor, heating units, bathroom expenses and more

That they wrote of 50% or 100% the first year depending on the items.  This sounds like a great way to go gien the amount of rehab

Ashish Acharya · Answer

@Susan O.

Basis rule that will help you understand this is:

1) before renting the property - Majority of the works done (Rehab) will be added to the basis of the property. Cannot be expensed right away.

2) after renting the property- Repairs are deducted the same year. Improvements are added to the basis and depreciated. Some of the improvements will qualify for the safe harbor depending on the expense amount(less than 2500) and type of the improvements.

Hi for those of you who do major value add apartments how do you expense most of these things. I've heard on first year purchase you can expense 100% or some say only 50% for bonus or accelerating depreciation?

•  Most of the value-add repair and improvements before renting the property will be added to the basis of the property and depreciated. Generally, cannot deduct them. After you started renting and depreciating the property, the additional asset purchase can qualify for 100% bonus depreciation or 179 expense starting 2018.

Section 178 -

• Sec 179 * - similar concept with 100% expensing. But after putting a property in service. Has more limitation compared to bonus depreciation? Both 100% bonus depreciation and sec 179 have their own place and need careful evaluation if the combination of these is better.

Bonus Depreciation different from accelerating depreciation?

• - Bonus depreciation is also one of the accelerated depreciations method. Rather than depreciating an asset over 5 years, you are depreciating it the 1st year (100% depreciation). Remember, 100% depreciation might not always be ideal based on your income level.

Do people purposeley buy in January 2019 so they can have the WHOLE first year to write off improvements instead of December closing which would just be a few days of 2018

• Yes, people do that for various reason. For tax purpose, as mentioned above, the major improvements cannot be written off, it is added to the basis. So, even if you close in December, you will not write off that ends up with a loss. Also, even if you had a loss, you can use that next year anyway, so we do not lose it.  So basically in the same position as if you had bought in Jan.

Could we expense major rehab improvements like Roof, Plumbing, Heaters, Windows first year? What are the pros and cons of accelerating or doing bonus depreciation

• Again, major rehab improvements are added to the basis of the property. Cannot be expensed. There are some exceptions from the safe harbor, so each expense will have to be individually evaluated.

Again acceleration depreciation is not always a good idea.

• If you are in the low tax bracket, it's better to slow down depreciation.
• Also, if an apartment is a big enough operation, going forward there is a new limitation on excess business loss, the loss realized might not be deductible anyway.

Looks like this is a big investment, and guidance of the professional is required here. Make sure you talk to a professional.

Susan O. · Answer

Accountant said kitchen and floors is 7 years, roof if flat is 15 years.

is that incorrect

Susan O. · Answer

Maybe do a segragation and acceperate some repairs like kitchen and floors over 7 years?  Then accelerate some over 3 year or 5 year schedule like painting or landscaping?

Accelerate some things like roof over 15 years?  Windows over X amount of years?

Appliances Tools and certain business equipment for the property do it over the accelerated bonus 179 depr?

Eamonn McElroy · Answer

@Susan O.

Generally speaking you cannot expense or "accelerate" depreciation on costs before the property is placed in service.  Especially if the majority of those costs go to improving the building instead of appliances, land improvements, etc.

Residential rental real estate is depreciated straight line over 27.5 years and is not eligible for bonus deprecation or S179.

You should be coordinating with your CPA on this.  If she isn't able to provide answers, options, and strategy it may be time to re-evaluate.

Susan O. · Answer

Thanks I'm using my local accountant right now.  She  seems to be very conservative.

For instance I was going to write off flights while I monitor the renovations of the new property and she said I can't write off flights but only auto

We plan to spend about $100,000 in improvements over 2 months and wanted to deduct as much as possible in the first year

We were thinking to write off or accelerate the first years improvements that are able to.  If we accelerated or did bonus depreciation or something creative to write off the majority of the $100,000 in the first year?

Susan O. · Answer

Yes I have a partner on this deal we're just 1/2 owners

I'll lok into that and see if my current CPA can handle all the expenses and maximizing the capiliazation and deductions in the first year.

Hopefully that rolls forward on each year?

I think we might spend $150,000 the first year on renovating the units and roofs  then I want to write that all off

How are Renovators planning for Taxes W new Apartment improve

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