What to do about Taxes

Calumet City, IL · Member since 2014 · 312 posts · 49 votes

I'm not really sure which forum this should be in. But my question is, how do tax write offs work as far as repairs and upgrades are concerned? I have read and heard some people say any repair and/or upgrade you perform is tax deductible. However I called the Tax accountant that normally does my annual taxes and she said that you can only deduct things deemed as upgrades. For example.....Fixing a furnace is a repair (not deductible) but replacing the furnace is an upgrade (is deductible). What does the law say concerning this? Thanks.

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Frank M.

Commercial Real Estate Agent · Sudbury, MA · Member since 2014 · 118 posts · 25 votes

12y

It's time for a new accountant.

For a rental property, repairs are all an expense, deductible that year. Things like a new appliance, furnace, etc are depreciated. The instructions for schedule E should help clarify what's 'repair' and what's an 'upgrade'. Most items are one or the other with little grey area.

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Frank M.
Commercial Real Estate Agent · Sudbury, MA · Member since 2014 · 118 posts · 25 votes
12y
It's time for a new accountant.

For a rental property, repairs are all an expense, deductible that year. Things like a new appliance, furnace, etc are depreciated. The instructions for schedule E should help clarify what's 'repair' and what's an 'upgrade'. Most items are one or the other with little grey area.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
You've actually got it backwards, sort of. All the normal repairs....appliance repairs, furnace Repairs, toilets, painting, etc. are deductible just like insurance and property taxes. "Upgrades" as you call it, which be capital improvements like a furnace Replacement, roof Replacement, etc are Not immediately deductible in full. They have to be Depreciated (deducted) a certain percentage each year depending on the set life expectancy of that item(ie 5, 7,10,15 years, etc).
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Jarrett Harris
OP
Calumet City, IL · Member since 2014 · 312 posts · 49 votes
12y
Okay thanks for the info so far. My accountant did mention the depreciation thing. However she is leading me to believe that other things I have done like

Painting

repaired electrical wiring

repaired leaking toilets

Pipe under the sink replaced

Are not deductible.
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Rhett TullisBusiness Member
Property Manager · Oklahoma City, OK · Member since 2013 · 1k+ posts · 617 votes
12y
I concur with @Frank M. you need to get a new accountant badly. Find one that specializes in real estate issues if you can.
[email protected]405-283-6522
Integrity Oklahoma
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Jarrett Harris
OP
Calumet City, IL · Member since 2014 · 312 posts · 49 votes
12y
What about all of the money I have spent for labor to have my handy man fix things? Is that deductible also?
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Sylvia B.
Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes
12y
Yes.
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Jarrett Harris
OP
Calumet City, IL · Member since 2014 · 312 posts · 49 votes
12y
Maybe this is what my accountant was talking about???

http://www.nolo.com/legal-encyclopedia/repairs-vs-improvements-how-tax-deductions-differ-landlords.html
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Pat Martin
Knoxville, TN · Member since 2014 · 116 posts · 57 votes
12y
Yes it is but you need to get a w9 from him/her.
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Pat Martin
Knoxville, TN · Member since 2014 · 116 posts · 57 votes
12y
No, thats not what your accountant was saying. If your accountant said what you said they did they have no clue what they are doing. Find a new one.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
I'm pretty sure she said what the referenced article says. They learn repairs vs improvements probably at freshmen orientation. I think you got it backwards. Now that you understand the basics, ask her again.
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Jarrett Harris
OP
Calumet City, IL · Member since 2014 · 312 posts · 49 votes
12y
I will ask her again within the next couple days. If here answer doesn't make sense I will point her to EVERY thing I have read on google so far that says repairs are deductible. If I don't get what I no know is the right answer my wife and I will be getting a new tax accountant. We have put a lot of money into this building since October.
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Jarrett Harris
OP
Calumet City, IL · Member since 2014 · 312 posts · 49 votes
12y
@Pat Martin

Please explain the W9
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
@Jarrett Harris to clarify, is this a building you just bought and you are getting it ready to rent, OR have you had it rented before and are just repairing things. This is important, because if it's the former, All repairs and improvements DO simply get added to the cost of the building for depreciation, and don't get deducted now.
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Jarrett Harris
OP
Calumet City, IL · Member since 2014 · 312 posts · 49 votes
12y
Originally posted by @Wayne Brooks:
@Jarrett Harris to clarify, is this a building you just bought and you are getting it ready to rent, OR have you had it rented before and are just repairing things. This is important, because if it's the former, All repairs and improvements DO simply get added to the cost of the building for depreciation, and don't get deducted now.

This is a building my Wife and I bought in October of last year. When we got it, it was 50% occupied. We did several small, and a few large repairs. It is now Fully occupied.
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Jarrett Harris
OP
Calumet City, IL · Member since 2014 · 312 posts · 49 votes
12y
Also what about the cost of snow removal? Spent a lot on that this winter.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
Well, that's dicier. Monies spent to get a property "rent ready" for Your first rental of that property get added to the basis for depreciation, not immediately deducted. This is likely the same for the apartments that were empty when you bought it, I'm not sure. Hopefully we can get @Steven Hamilton II to clarify.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
12y
Originally posted by @Jarrett Harris:
I'm not really sure which forum this should be in. But my question is, how do tax write offs work as far as repairs and upgrades are concerned? I have read and heard some people say any repair and/or upgrade you perform is tax deductible. However I called the Tax accountant that normally does my annual taxes and she said that you can only deduct things deemed as upgrades. For example.....Fixing a furnace is a repair (not deductible) but replacing the furnace is an upgrade (is deductible). What does the law say concerning this? Thanks.

Jarrett,

Fire him asap. You deduct repairs in the same year. Improvements are depreciated over specified time periods.

Anything done before the property is ready and available for rent must be capitalized and depreciated over specific time frames. Meaning if it needs a furnace repair before it can be rented then it is not available.
[email protected]224-381-2660
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Pat Martin
Knoxville, TN · Member since 2014 · 116 posts · 57 votes
12y
about why you need w9s

http://taxes.about.com/b/2008/01/27/whats-form-w-9.htm

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Frank M.
Commercial Real Estate Agent · Sudbury, MA · Member since 2014 · 118 posts · 25 votes
12y
you asked about snow - yes, it's a deduction. Others cautioned about the repairs prior to actually being rented. I agree.

I think it's fair to say that once rented, every cent going to the property then falls into expense or improvement. Pure services are always expensed. Snow, lawn care, etc are covered of course. Note - if your place is so high end you have a landscaper install a backyard pond or waterfall, that's an improvement. I mean normal annual service, not such projects.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
@Steven Hamilton II It looks like this is a multi unit property, 50% vacant when he bought it 6 mo.s ago, and that most of the repairs were to get those vacant apt.s rent ready. Repairs on the vacant units get added to the basis, and repairs for occupied units get deducted
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Jarrett Harris
OP
Calumet City, IL · Member since 2014 · 312 posts · 49 votes
12y
Thanks everyone for your help. I did find a new accountant. He seems to be pretty good. However It looks like my wife and I are going to have a tax bill. I am not worried about paying just surprised. Apparently when you pass an annual income of $125K/year certain you no longer get certain deductions like the Child education credit, interest deduction from students loans, and most surprising we cannot deduct anything from the expenses of our rental property. Anyone else encounter that?

Maybe @Steven Hamilton II

can help answer?
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Pat Martin
Knoxville, TN · Member since 2014 · 116 posts · 57 votes
12y
That is not true that you can not deduct expenses. What is limited is taking your passive loss from rentals and using it to reduce your earned income. If you make 100k or less you can write off $25k in losses per year. And for every $2 over 100k your 25k loss is reduced by $1. So once your income reaches $150k you can't take any loss.
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Jarrett Harris
OP
Calumet City, IL · Member since 2014 · 312 posts · 49 votes
12y
Originally posted by @Pat Martin:
That is not true that you can not deduct expenses. What is limited is taking your passive loss from rentals and using it to reduce your earned income. If you make 100k or less you can write off $25k in losses per year. And for every $2 over 100k your 25k loss is reduced by $1. So once your income reaches $150k you can't take any loss.

Well if that is the case that would explain it.
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Frank M.
Commercial Real Estate Agent · Sudbury, MA · Member since 2014 · 118 posts · 25 votes
12y
But to add to the point, the $100K-$150K range is AGI, not gross. So a couple might be able to use a 401(k) to reduce their income, along with an HSA if eligible, or dependent care account if you have a child.

And the loss isn't gone forever. It carries forward year after year until (a) the property has a bit of gain instead of losses, (b) your income drops below the phaseout level, or (c) you sell the property, If you buy another property that's cash positive, these losses can offset the profit from the new one.
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Jarrett Harris
OP
Calumet City, IL · Member since 2014 · 312 posts · 49 votes
12y
We have 1 child and we were able to deduct a portion of daycare expenses, but that was about it. The account also did mention about putting more into our 401K to reduce the taxable amount.
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