Tax Accounting for 100K Rental Property Remodel

Tax, SDIRAs & Cost Segregation
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Tax Accounting for 100K Rental Property Remodel

Luke H.
Real Estate Investor · Dallas, TX · Member since 2013 · 388 posts · 174 votes

Seeking help/advice on doing accounting on this major remodel.

Tax Accounting for Rental 100K Remodel. In 2019 I started a remodel and finished in it 2020. What are the best ways to handle the expenses, rental income, depreciation in my accounting to keep my tax bill low and maximize all the expenses? I plan to hold this rental for at least 15 years.

Any and all advice is welcomed.
Thank you!

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y

@Luke H.

The crushing news first. If you finished your remodel in 2020, you will not get any benefits on your 2019 tax return. The entire property was placed in service in 2020, so this is when the depreciation and everything else starts. You have to wait until the next year, sorry.

To prepare for the next year taxes, please itemize your entire rehab expenses as much as possible, as in recording every invoice paid and every store purchase. If you happen to benefit from more depreciation on your 2020 tax return (which is impossible to predict without having your complete 2020 income and expenses for this property) - then you'd need to get professional help analyzing your detailed spreadsheets to maximize depreciation.

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  • Dalyn Hazell
    Rental Property Investor · Springfield, MO · Member since 2020 · 120 posts · 96 votes
    6y

    For starters, I would get a separate bank account, if you haven't already, so that doing your taxes is a lot easier for yourself or your accountant. 

    Then, I'd work with a reputable accounting software like Quickbooks or Wave. You can use Excel, but I like the ease of use these programs provide. In there, you'll be able to keep track of your income and expenses while easily syncing it with your bank account I mentioned earlier. 

    Also, if you're not interested in doing the taxes youself, I recommend you work with a CPA knowledgeable about real estate. Bonus points if they are investors themselves.

    You touched on depreciation, and this is very important for tax purposes. Make sure to keep track of your property's purchase price (including closing costs), as well as any capital improvements you make (these are improvements beyond ordinary repairs). 

    You won't need to know the following formula if your CPA is doing your taxes, but here we go:

    Purchase Price + Cap. Improvements - Land Value = Depreciable basis

    Depreciable basis / 27.5 years (if residential real estate) = Depreciation deduction

    Depreciation is powerful because it can potentially wipe out your cash flow (on paper), but you never really spent anything for it. This leads many new investors to pay little or no tax on their RE businesses.

    Good luck!

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y

    @Luke H.

    The crushing news first. If you finished your remodel in 2020, you will not get any benefits on your 2019 tax return. The entire property was placed in service in 2020, so this is when the depreciation and everything else starts. You have to wait until the next year, sorry.

    To prepare for the next year taxes, please itemize your entire rehab expenses as much as possible, as in recording every invoice paid and every store purchase. If you happen to benefit from more depreciation on your 2020 tax return (which is impossible to predict without having your complete 2020 income and expenses for this property) - then you'd need to get professional help analyzing your detailed spreadsheets to maximize depreciation.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    6y

    @Luke H.

    Michael is right - If you finished up the remodel in 2020, it is deemed place is service in 2020. As such, capturing expenses on the property will start on your 2020 tax return.

    Make sure you have the basis recorded accurately which includes the cost of the property and all the renovation work you did. This will allow you to calculate more depreciation in 2020.

    [email protected]917-280-8544
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