First Deal: Capitalization of Costs to put Rental Unit in Service

[Joseph Turner]

Hello All:

Thank you in advance for all the generous contributions all of you make. I appreciate you taking the time to answer my question(s).

I have my first deal under contract and will need to invest 10-15k to get the property in rental shape. I think I have managed to wade through numerous threads and postings on other sites about the ins and outs of deducting vs depreciating costs associated with putting my property into service.

My understanding is that any and all costs...even if they would typically be deductible repairs were my unit to be currently rented or in-between renters must be rolled into the basis of my purchase and subsequently depreciated. I think that sucks, but that seems to be what I have gathered.

If this is incorrect, please let me know.

Further, it seems that the general consensus is that property goes into service the day it is ready to be occupied by a renter. Again, I think this sucks, but that seems to be what I have gathered.

Can I get a confirmation of this?

Is there any way to massage this such that repairs and cosmetic changes can be made in between the time the renter signs the lease and when they take occupancy therefore allowing me to deduct these expenses?

Alternatively, and also more inconveniently...would anyone recommend deferring these repairs until after the tenant takes possession? My major concern obviously is that if I don't do all the repairs that i should make pre-occupancy that the unit will not show as well and perhaps result in a lower rental rate versus the prospect of having several thousand dollars of normally deductible expenses subsequently depreciated over 27.5 years.

Thank you.

[Steven Hamilton II]

Hello Joseph Turner,

Welcome to the BiggerPockets.

Yes, you are pretty much correct in regards to all your research.

You can try to push some repairs until after the property is rent ready. Rent ready does not mean perfect condition. It means it is reasonably rentable to you market. You can start the tenant search and then decide to change out the cabinets as long they are usable. Same can be said for a Garage door opener or rail.

Do some research on DIY cost segregation. This may make you feel better; although it depends upon the type of property you purchased.

Do yourself a favor and just get as much done as you can and then rent. It will help you find a better tenant.

-Steven the Tax Guy