Tax strategies for rentals

47 Replies

I have my first rental under contract. Though I understand taxes in a general sense and what to do for my own house I'm in the dark when it comes to whats different for rental properties. What are got strategies to look into and other options I have that I just dont compare to my personal house. So any advice on what to look into would be great. Both specific topics and possibly books or other resources that I can do some learning. Thanks in advance.

Originally posted by @Nik Moushon :

I have my first rental under contract. Though I understand taxes in a general sense and what to do for my own house I'm in the dark when it comes to whats different for rental properties. What are got strategies to look into and other options I have that I just dont compare to my personal house. So any advice on what to look into would be great. Both specific topics and possibly books or other resources that I can do some learning. Thanks in advance.

 Congrats going under contract, Nik.  I know you've been looking at a lot of options for a while. Sweet!

Any work you do to it before it's placed 'in service' will be added to your cost basis.  Maintenance and repairs done after it's in service are deductible that (this) year.  In service to me means advertised for rent at least, having an approved tenant pending, better.  If already rented, you don't have to worry as it's obviously already in service.

Another trick I use is I don't replace an entire cap ex, like a roof all at once.  If completely replaced, it has to be depreciated.  If less than, say, 76%, it can be a repair and deducted that year. 

Obviously you'll have buikding depreciation to help tax-wise. On a small rental, cost segregation is probably a waste.  Just go straight line 27.5 years.

Unfortunately all tax pros are suoer busy right now so your stuck with street guys like me.  Hopefully the pros will be available next week.  Congrats again!

Originally posted by @Steve Vaughan :

Another trick I use is I don't replace an entire cap ex, like a roof all at once.  If completely replaced, it has to be depreciated.  If less than, say, 76%, it can be a repair and deducted that year. 

Holy smokes that's a good trick for DIYers, Steve. I never even thought of that.

Get paid:

@Steve Vaughan

OK, that's interesting, I managed to delete half my answer above.

What I meant to say is that this would be such a useful trick to a DIYer because it means, on something like a simple gable roof like the one pictured, you could reshingle half the main roof in early September, tarp the ridge, wait out the winter, and then reshingle the other half in April. The first half of the roof expense gets fully written off in the first year, the second half gets written off in the second year. The same trick would work if you had something more complex and dangerous like a gambrel roof to do, but with contractors handling the more difficult parts. You would handle the easy ridge and top panels in the fall of the first year, they would handle the awful side work in the spring of the second year, and it gets written off in two years.

All sorts of enterprising tax scenarios become possible.

Originally posted by @Steve Vaughan :
 On a small rental, cost segregation is probably a waste.  Just go straight line 27.5 years.

I agree, but I'm shocked that @Yonah Weiss voted for this comment instead of debating it  :)

Originally posted by @Jim K. :
Originally posted by @Steve Vaughan:

Another trick I use is I don't replace an entire cap ex, like a roof all at once.  If completely replaced, it has to be depreciated.  If less than, say, 76%, it can be a repair and deducted that year. 

Holy smokes that's a good trick for DIYers, Steve. I never even thought of that.

Sorry to burst your bubble, but 75% replacement of the roof is not deductible as repair, save for some unique circumstances. Not to mention that it's quite impractical on a house and will cost more.

Originally posted by @Nik Moushon :

I have my first rental under contract. Though I understand taxes in a general sense and what to do for my own house I'm in the dark when it comes to whats different for rental properties. What are got strategies to look into and other options I have that I just dont compare to my personal house. So any advice on what to look into would be great. Both specific topics and possibly books or other resources that I can do some learning. Thanks in advance.

Stephen Fishman's book is a good one: 

https://www.amazon.com/Every-Landlords-Tax-Deduction-Guide/dp/1413324665

But nothing beats good personalized advice from a tax pro. For example, depending on your situation, you may not even benefit from various creative strategies.

Originally posted by @Michael Plaks :
Originally posted by @Steve Vaughan:
 On a small rental, cost segregation is probably a waste.  Just go straight line 27.5 years.

I agree, but I'm shocked that @Yonah Weiss voted for this comment instead of debating it  :)

 Honest service providers that do more than just recommend their services or to 'get a professional' do that. I wasnt surprised.

@Jim K.

"All sorts of enterprising tax scenarios become possible."

As well as penalties and interest from the IRS.  : )

I'd advise you to consult your tax CPA/EA before taking this position on your tax return...

Originally posted by @Michael Plaks :
Originally posted by @Jim K.:
Originally posted by @Steve Vaughan:

Another trick I use is I don't replace an entire cap ex, like a roof all at once.  If completely replaced, it has to be depreciated.  If less than, say, 76%, it can be a repair and deducted that year. 

Holy smokes that's a good trick for DIYers, Steve. I never even thought of that.

Sorry to burst your bubble, but 75% replacement of the roof is not deductible as repair, save for some unique circumstances. Not to mention that it's quite impractical on a house and will cost more.

@Michael Plaks

Just in case you didn't realize it, Michael, that small figure in the distance in the picture, way way up there? That's ME up on that roof, busting my hump. So how about you just let me worry about how "quite impractical on a house" reshingling half a roof is?

Originally posted by @Eamonn McElroy :

@Jim K.

"All sorts of enterprising tax scenarios become possible."

As well as penalties and interest from the IRS.  : )

I'd advise you to consult your tax CPA/EA before taking this position on your tax return.

@Eamonn McElroy

Of course I will. That's what I pay the man for.

@Jim K.

Good.  You might want to ask him to explain the BAR rules (Betterment, Adaptation, Restoration) surrounding capitalization.

Maybe you can expense it as de minimis over multiple years, but that seems like a lot of work to me (what Michael was hinting at).  No bonus or S179 on a residential roof.  Might be able to expense the whole roof under small taxpayer safe harbor which makes piecemealing the restoration over multiple years moot.

Originally posted by @Steve Vaughan :
Originally posted by @Michael Plaks:
Originally posted by @Steve Vaughan:
 On a small rental, cost segregation is probably a waste.  Just go straight line 27.5 years.

I agree, but I'm shocked that @Yonah Weiss voted for this comment instead of debating it  :)

 Honest service providers that do more than just recommend their services or to 'get a professional' do that. I wasnt surprised.

Did you notice my :)  ? I was poking fun at my respected colleague. 

Originally posted by @Jim K. :

Sorry to burst your bubble, but 75% replacement of the roof is not deductible as repair, save for some unique circumstances. Not to mention that it's quite impractical on a house and will cost more.

Just in case you didn't realize it, Michael, that small figure in the distance in the picture, way way up there? That's ME up on that roof, busting my hump. So how about you just let me worry about how "quite impractical on a house" reshingling half a roof is?

Deal. And you let me worry about what's deductible. 75% is not half, by the way.  

Originally posted by @Steve Vaughan :
Originally posted by @Nik Moushon:

I have my first rental under contract. Though I understand taxes in a general sense and what to do for my own house I'm in the dark when it comes to whats different for rental properties. What are got strategies to look into and other options I have that I just dont compare to my personal house. So any advice on what to look into would be great. Both specific topics and possibly books or other resources that I can do some learning. Thanks in advance.

 Congrats going under contract, Nik.  I know you've been looking at a lot of options for a while. Sweet!

Any work you do to it before it's placed 'in service' will be added to your cost basis.  Maintenance and repairs done after it's in service are deductible that (this) year.  In service to me means advertised for rent at least, having an approved tenant pending, better.  If already rented, you don't have to worry as it's obviously already in service.

Another trick I use is I don't replace an entire cap ex, like a roof all at once.  If completely replaced, it has to be depreciated.  If less than, say, 76%, it can be a repair and deducted that year. 

Obviously you'll have buikding depreciation to help tax-wise. On a small rental, cost segregation is probably a waste.  Just go straight line 27.5 years.

Unfortunately all tax pros are suoer busy right now so your stuck with street guys like me.  Hopefully the pros will be available next week.  Congrats again!

 Thanks Steve! You wont believe which one it is. Hint: this is now the third time its come back in my lap. This time I didn't let it get away.

I'm sure there are lots of things I'll figure out which will help me with taxes or not. Got two books that I plan on reading. 

Originally posted by @Michael Plaks :
Originally posted by @Nik Moushon:

I have my first rental under contract. Though I understand taxes in a general sense and what to do for my own house I'm in the dark when it comes to whats different for rental properties. What are got strategies to look into and other options I have that I just dont compare to my personal house. So any advice on what to look into would be great. Both specific topics and possibly books or other resources that I can do some learning. Thanks in advance.

Stephen Fishman's book is a good one: 

https://www.amazon.com/Every-Landlords-Tax-Deduction-Guide/dp/1413324665

But nothing beats good personalized advice from a tax pro. For example, depending on your situation, you may not even benefit from various creative strategies.

 Thanks for the book suggestion! 

I do plan on getting a CPA for next years taxes. I just want to know what to do for the next year and how to best prepare for taxes. I dont like knowing about a subject I'm be doing a lot of dealing in, even if im not the expert.

@Steve Vaughan kindly explain the 76% rational to those of us that don’t know the tax code as well as you please?!

Originally posted by @Matt Ward :

@Steve Vaughan kindly explain the 76% rational to those of us that don’t know the tax code as well as you please?!

 I usually just do half but thought 3/4 might be ok.  Guess not. And I said less than 76%.  

Thanks for adding so much value and showing your true colors. 

Better to be thought of as a pompous jerk than to open your mouth and remove all doubt...

Originally posted by @Nik Moushon :
Originally posted by @Steve Vaughan:
Originally posted by @Nik Moushon:

I have my first rental under contract. Though I understand taxes in a general sense and what to do for my own house I'm in the dark when it comes to whats different for rental properties. What are got strategies to look into and other options I have that I just dont compare to my personal house. So any advice on what to look into would be great. Both specific topics and possibly books or other resources that I can do some learning. Thanks in advance.

 Congrats going under contract, Nik.  I know you've been looking at a lot of options for a while. Sweet!

Any work you do to it before it's placed 'in service' will be added to your cost basis.  Maintenance and repairs done after it's in service are deductible that (this) year.  In service to me means advertised for rent at least, having an approved tenant pending, better.  If already rented, you don't have to worry as it's obviously already in service.

Another trick I use is I don't replace an entire cap ex, like a roof all at once.  If completely replaced, it has to be depreciated.  If less than, say, 76%, it can be a repair and deducted that year. 

Obviously you'll have buikding depreciation to help tax-wise. On a small rental, cost segregation is probably a waste.  Just go straight line 27.5 years.

Unfortunately all tax pros are suoer busy right now so your stuck with street guys like me.  Hopefully the pros will be available next week.  Congrats again!

 Thanks Steve! You wont believe which one it is. Hint: this is now the third time its come back in my lap. This time I didn't let it get away.

I'm sure there are lots of things I'll figure out which will help me with taxes or not. Got two books that I plan on reading. 

 Yep, I know the one. Very cool.

I only responded to this at all because it was you.  You can see why posting to any thread tax related unless you're a  professional who only recommends getting a professional and/or only has a pompous remark is all you get for trying to help.  

Whatever, hope this place and plan works out for you! 

@Steve Vaughan your welcome. There is value in correcting inaccurate and/or bad advice. Not everyone is right all the time, including me.

@Steve Vaughan - it's great to help. You gave some good advice on the in-service issue.

Then you gave an incorrect advice on partial replacements. The problem is that people pick up your advice and run with it - as @Jim K. immediately did.

See - even half (50%) is incorrect and will set you up for trouble with the IRS. Just because you do it does not make it OK to do and does not make it OK to share it as advice for others. 30% is generally considered to be safe, but it's based on interpreting examples in the Treasury Regulations and not on some formal rule.

We all make mistakes. When I do, I apologize and I thank the person who pointed it out.

Instead of learning about your mistake, you guys chose to attack two of the top contributors on this forum. Oh well, you can lead a horse to water, but you cannot make her drink.

@Steve Vaughan

Does this mean that if I buy a rental for brrrr and before I start rehabbing, I advertise for rent then I can deduct the repair cost?

Thanks.

Originally posted by @Michael Plaks :

@Steve Vaughan - it's great to help. You gave some good advice on the in-service issue.

Then you gave an incorrect advice on partial replacements. The problem is that people pick up your advice and run with it - as @Jim K. immediately did.

See - even half (50%) is incorrect and will set you up for trouble with the IRS. Just because you do it does not make it OK to do and does not make it OK to share it as advice for others. 30% is generally considered to be safe, but it's based on interpreting examples in the Treasury Regulations and not on some formal rule.

We all make mistakes. When I do, I apologize and I thank the person who pointed it out.

Instead of learning about your mistake, you guys chose to attack two of the top contributors on this forum. Oh well, you can lead a horse to water, but you cannot make her drink.

 Fair enough, Michael.  I was wrong and I apologize.  It won't happen again, trust me.

Originally posted by @Parth Patel :

@Steve Vaughan

Does this mean that if I buy a rental for brrrr and before I start rehabbing, I advertise for rent then I can deduct the repair cost?

Thanks.

 Can't help ya, but.  I would say no but defer to the pros.  I was thinking about just maintenance and trash out, not rehab.  Good luck.

Originally posted by @Michael Plaks :

@Steve Vaughan - it's great to help. You gave some good advice on the in-service issue.

Then you gave an incorrect advice on partial replacements. The problem is that people pick up your advice and run with it - as @Jim K. immediately did.

See - even half (50%) is incorrect and will set you up for trouble with the IRS. Just because you do it does not make it OK to do and does not make it OK to share it as advice for others. 30% is generally considered to be safe, but it's based on interpreting examples in the Treasury Regulations and not on some formal rule.

We all make mistakes. When I do, I apologize and I thank the person who pointed it out.

Instead of learning about your mistake, you guys chose to attack two of the top contributors on this forum. Oh well, you can lead a horse to water, but you cannot make her drink.

Oh brother...

@Michael Plaks

The scales have fallen from my eyes and I have been enlightened with the ray of pure and perfect knowledge that you have chosen to shine upon me in my benighted ignorance. Thank you, Michael. Only you, you alone, you and no other, have stood between me and grave error.

I hope you find this satisfactory.

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