Deducting improvements from a rehab?

Question

I am starting a rehab for a single family property come the beginning of June (tenants lease ends may). I am researching about section 179 of the tax code and trying to understand if this applies. The house is under my name and not a LLC. And this should be a fairly extensive gut. Can someone please give me some insight as to if I am able to deduct rehab costs? If so how? And what other tax strategies do you guys do when rehabbing a long term rental? Thanks In advance

Ashish Acharya · Answer

The Sec 179 and accelerated bonus will be of limited use for you.

Most of the gut rehab will be added to your balance sheet as the building improvements and depreciated over 27.5 years.  You could potentially take a bonus depreciation on the appliances.

I would suggest separating the turnover expenses and guy rehab expenses. Turning over expenses could potentially be deducted.   If done correctly, your tax advisor should be able to help you save some money.

Dave Spooner · Answer

@Alexander Glazer You definitely are able to. You will likely use the de Minimis clause more frequently than Section 179. Anything you can't fully deduct, you can look to use accelerated depreciation.

If you're doing a rehab, there will likely be significant tax savings for you - one of the big bonuses of real estate investing!

Julio Gonzalez · Answer

Hi @Alexander Glazer , one tax strategy that I highly recommend before performing a rehab is a cost segregation study. These improvements could qualify for bonus depreciation and it also separates your personal property into asset classes to depreciate over that asset's particular useful life rather than the building's useful life of 27.5 or 39 years.

Basit Siddiqi · Answer

@Alexander GlazerI would hand the scope of work to your CPA and have a conversation to understand what will be currently deductible and what will need to be capitalized.If the unit is considered 'in service', that gives you more leverage to take advantage of bonus depreciation or de minimis safe harbor election.If the unit is not considered 'in service', much of the cost will need to be capitalized.

Deducting improvements from a rehab?

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