Tax Question: Rental prop -> failed renovation -> sold

6 Replies

Bought a rental property in LA County, CA back in April 2018.  Rented until Sept. 2018.  Hired contractor for renovation in May 2018. Due to unexpected increase in cost to complete renovation the renovation project was abandoned April/May 2019.  Sold property in July 2019.  Question is are any of the fees paid for contractor/architect/permits allowable for any tax offsets/carryovers/etc for tax filing?  Thanks!

Obviously a question for your CPA (which I am not), but I would think that any expense incurred that is business related to your property can be charged off against income the property generated. It doesn't matter that the renovation was ultimately abandoned... if you spent the money on the property (in furtherance of the property), it can be written off on taxes. Hell, I can go to lunch and talk about real estate and write off 50% of the lunch! So pretty sure you can write off actual expenses! Your CPA will know for sure.

Randy

Originally posted by @Simone Roche :
Bought a rental property in LA County, CA back in April 2018.  Rented until Sept. 2018.  Hired contractor for renovation in May 2018. Due to unexpected increase in cost to complete renovation the renovation project was abandoned April/May 2019.  Sold property in July 2019.  Question is are any of the fees paid for contractor/architect/permits allowable for any tax offsets/carryovers/etc for tax filing?  Thanks!



Yes you get the deductions, indirectly. Most of the improvement costs need to be added to the basis. The increase  in basis ultimately decreases your gain from the sale of the property. 

I would try to segregate the expenses as operational cost as much as possible to create the rental schedule E loss rather than decrease schedule D gain for a better tax impact. 

Your CPA should explain this in more detail. 

 

Thanks for the replies! @Ashish Acharya - just wanted to make sure my situation is clear although the project did not start the fees for initiating the project can be included into basis as expenses and that I should try and report them as operational cost as much as possible.  I don't have a CPA yet and was hoping to do this myself with one of the tax software but it looks like it might be best if I do hire a CPA for this. Thanks again!

There are so many write offs you can take advantage of, I would highly recommend you use a CPA... it will cost a little money, but save you a lot in the end. I've used the automated systems before owning properties, but don't know if I would trust them with something as complex as rental real estate. Hopefully you have formed some sort of corporate structure...LLC, Sub S Corp, etc. It has allowed us to write off car payments, car insurance, health insurance, cell phone payments, internet expenses, lunches. By having these flow through a corporation we get to deduct these as pre-tax expenses.

As a corporation, we only pay taxes on the money left over at the end of the year that we managed not to expense. With ~3% depreciation on top of the write offs for all our expenses, our taxable income is effectively zero. You will truly be amazed at what you will save!

W2 tax payers on the other hand  pay taxes on ALL their W2 income before they even get their paycheck.

Randy 

@Simone Roche

Your gain on the property should be the sales price less purchase price less renovation costs plus the depreciation you took while the property was a rental in 2018.

Your CPA should have this all explained to you.

Originally posted by @Basit Siddiqi :

@Simone Roche

Your gain on the property should be the sales price less purchase price less renovation costs plus the depreciation you took while the property was a rental in 2018.

Your CPA should have this all explained to you.

Thanks!  I've asked a few firms and was hoping that they'll confirm that there may be a deduction before hiring them but none will answer that question.  I wasn't going to hold them accountable if the deductions isn't available after looking at the paperwork so at the end I just ended up not taking those into account when I filed the taxes.  I figure if I can get a better picture as to whether money paid for contractor/architect/city planning fees are deductible I can always file an amendment.  Again, my main question is whether those fees may be deductible or not.