Depreciation vs. Deduction. Did I miss out?

2 Replies

In December 2017, I purchased what I wanted to be my first rental property.  Bought and paid for it with $30k.  I have done all of the repairs myself, and intended on having it available for rent in the summer of 2018.  Well, here I am and still working on it.  I have put about$15k in repairs/updates to it so have almost $45k into it.  I now hope to have it rented Summer 2019.
My question is, would I have been better off renting it out for a couple months for real cheap since it was in rough condition (say $250/mo) and then started working on it so I could have deducted the expenses in the 2018 tax year?  Or am I better off just doing it as I have, and adding to my cost basis for depreciation.   I have also accumulated $3k worth of tools.

I'm also figuring the power of depreciation is not as great as deducting in the current year as depreciation recapture will take place in the event the house is sold down the road.  For what its worth, this situation assumes I am married, with no kids and have a household AGI of  $120k.  Thank you!

Originally posted by @Stephen Kupferschmid :

In December 2017, I purchased what I wanted to be my first rental property.  Bought and paid for it with $30k.  I have done all of the repairs myself, and intended on having it available for rent in the summer of 2018.  Well, here I am and still working on it.  I have put about$15k in repairs/updates to it so have almost $45k into it.  I now hope to have it rented Summer 2019.
My question is, would I have been better off renting it out for a couple months for real cheap since it was in rough condition (say $250/mo) and then started working on it so I could have deducted the expenses in the 2018 tax year?  Or am I better off just doing it as I have, and adding to my cost basis for depreciation.   I have also accumulated $3k worth of tools.

I'm also figuring the power of depreciation is not as great as deducting in the current year as depreciation recapture will take place in the event the house is sold down the road.  For what its worth, this situation assumes I am married, with no kids and have a household AGI of  $120k.  Thank you!

You are right, deduction will be mostly be more beneficial with your level of AGI. 

Also, you probably could have deducted some of the work done on the house if you have rented it out earlier. But remember, even when rented, the improvements are always added to be basis of the peopery (unless improvements qualifies for safe harbor deduction).

@Stephen Kupferschmid

There is a breakeven point (a point in time) at which the total income taxes paid is the same regardless of which option you choose.   If your holding period is longer than this breakeven point, then you would likely benefit from the depreciation deduction vs the expense deduction option.  The reverse would be true if your intended holding period is shorter than the breakeven point.

Why not run the numbers out using your projected NOI for the next few years to determine which would have been the better option if you were to do it all over again. Be sure to limit the net passive loss allowance on your 1040 to $15K per year and assume that your other ordinary income stays constant.

Let us know the outcome of your investigation.