Just closed on a condo yesterday and trying to figure out if the expenses incurred during rehab are deductable. Not talking about the expense of the rehab, but what about the HOA, taxes, insurance, etc. have renters lined up for a couple months from now but wasn't sure if the usual expenses that will end up being paid for from the rent were deductible as expense during this time when it's not yet rented.
I think the argument there is that the intention is the property is a rental property, not a primary or secondary home, so as long as you never live in the home, I would think this argument is a nonissue.
But I am not a CPA, just a googler.
There is an IRS pub on rentals that you should download. Get receipts and save them.....get in the habit of photographing them now and file them on your computer.
The rule is something like...when your property is ready and available for rent all costs are operating costs. If not available...during rehab, add to cost basis. But read up. Marketing and make-ready take some time so a month or so isn't out of reasonable range....especially if you have a tenant. Two months may be stretching it, but maybe not.
Use a CPA. If you get too creative it might not look right and trigger an audit. The last thing I want is an audit over a couple hundred bucks. I know if I got audited today, I'll be just fine.
Read IRS publication.
Read secondary explanation, eg JK Lassiter book at library
If you are still confused, hire CPA.
The "creativity" or gray area is defining what is make ready and what is rehab. The leases around the universities all allow 2 week gaps in lease endings and beginnings....make ready. I just regrouted the kitchen, added two doors... from the master to the bath and from the bath to the toilet room (rented for 4 years without them)--and put carpet in one room and changed out the dishwasher. I called it make-ready. I had a deposit, lease not signed yet. But it only took 2 weeks. 2 months from on market to move-in would be a stretch here, but maybe not in other markets. A DIY painting (some places require painting between tenants) and flooring and deep clean could be make-ready with a signed lease. Waiting two months for a good tenant? I might, but not in this market. Gray area. But gutting the bath is rehab.
I will look into all of those resources.
Its definitely more "make ready" than rehab. We are replacing bedroom carpets (rest is hardwood), had to do some heavy duty scraping (travertine tile floor and the goobers that did the grout did not wipe the excess off the tile at all) and deep cleaning in the bathroom (tub was BLACK on the bottom!) . We are also painting and replacing the fridge, its dead and our inspector said not worth fixing. Also will be buying a washer and dryer as their are hookups and most of the rentals in our building come with it. We realize the washer, dryer, fridge and carpet will have to be depreciated, not taken as expense in this year.
We actually have a signed least to begin in August, and I am probably going to list on CL for summer rental, but not sure we really want to deal with turnover after three months...
Will consult the resources you all so kindly sent, and will talk to my CPA.
My main concern is can we claim the HOA ($130/mo), insurance ($35/mo), and utilities during our time before tenants move in. I don't see how it would be different from if you had a tenant move out and it took some time to find a tenant. During vacancy I would think its all deductable against any income you make on the rental.
The intent of the rule, I believe, is to require investors to add rehab costs to their cost basis....then to name a date when the rehab is complete and ready to rent and write off expenses from rhat date forward. 4 months is a long time to be considered make-ready. But there is a rental near me that is vacant months at a time--6 or 7months--because rhe owner puts 1 non-photo ad on Craigslist and prices the rent above market by $200. So read the IRS Pub. and follow the rules.
Did you accept an August lease because you're in a college market? Because once school starts it can be very difficult to lease a property until the next school term. Iif you want to do a summer lease, just give yourself the 2 week gap between tenants so it is a smooth transition.
Thanks @Marian Smith
Reading the IRS pub.
Yes, we are leasing to students for the fall semester. These condos are hard to come by and when it came up we felt we should buy now rather than wait and see if it lasted. Put an ad on postlets.com yesterday for summer rental and had our first inquiry today. Don't know why but having someone reply made me nervous. How do you tell if it's a scam? Well, I googled the name and found that they are someone local who seems like maybe a grad student at least by their twitter account info...so I will be calling them tomorrow to see about it a summer lease! Then it will be a non-issue.
I did read about the make ready prior to renting going toward your cost basis, BUT I also read somewhere about "start up" costs for your real estate business being expenses. A little confusing and somewhat grey area, but we are not really talking about a lot of rehab costs, some cleaners and some paint. More concerned about the other expenses such as HOA, taxes, etc. BUT according to what I read in the IRS pub, if we have an ad, and have inquiries and are screening tenants, we should be good to go now! Will still check with the CPA to be sure! :)
Oh, and in August we will start a 12 mo lease so no worries about next summer...hopefully!
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