BARRRRR strategy clarification

5 Replies

Hello. In coming months I am taking possession of a triplex with the intent to use the BRRRR strategy. 2 of the 3 units will undergo kitchen and bathroom renovations. Approx $20,000 will be spent.

Now I am hearing about this BARRRR strategy — which if I understand clearly — basically means that as long as I start to advertise and have potential tenants come to look at the units once we are to begin the reno, I will be able to write off all the reno work? 

This is truly amazing — I’m just hoping someone here has done this and can vouch. Even better, if there is an accountant on BP that can clarify this to being a legit strategy that won’t haunt me if the IRS come a knockin. 

Any assistance or knowledge here is appreciated. Thanks. 

Jeffrey 

In theory, it seems like a great strategy if the intent is not questioned and one simply looks at the facts.
So just like @Jeffrey Eugen  I wonder if anyone has successfully and reliably applied this strategy again and again.


Precisely, I am curious to know if this strategy will stand a case by the IRS that the intent was never in the first place to rent  the property straight away.
Anyone who knows?

@Jeffrey Eugen This is a HUGE mistake made by a lot of investors (simply because they don't know about it), so it's good that you brought it up.

Get ready for a trail of definitions... 

Deducting rehab/repair costs as operating expenses vs. capitalizing and depreciating them depends on when the property is placed "in service". 

In service means "ready and available" for rent.

In simplest terms, ready means livable; available means advertised for rent.

The key is, it has to be both ready AND available to be placed in service and, therefore, to deduct most of your rehab costs as operating expenses instead of capitalizing and depreciating them over time.

You can advertise a house you gutted down to the studs all you want, but there's no chance the IRS will support that being "livable".

But yes, it is very important to advertise ASAP, as soon as the property is in living condition.

@Nicholas Aiola What about advertising for rent a house and having viewings taking place before one decides to gut it down to the studs to do a second story addition ?
In this scenario, is it  possible to deduct most (if not all) of the rehab costs as operating expenses?

@Patrice Penda If a property is placed in service and you decide to gut it in between tenants, the property would be referred to as "idle".

Publication 527 tells us that we can continue to claim depreciation for ide property even if it's temporarily not in use.

That said, if you buy a property on January 1, list it for rent on January 2, and on January 3 you take down your advertisement and begin to gut the property, I think you may have a hard time proving it was ever placed in service to begin with since it was never truly advertised with the intent to actually rent it out.

Originally posted by @Nicholas Aiola :

@Patrice Penda If a property is placed in service and you decide to gut it in between tenants, the property would be referred to as "idle".

Publication 527 tells us that we can continue to claim depreciation for ide property even if it's temporarily not in use.

That said, if you buy a property on January 1, list it for rent on January 2, and on January 3 you take down your advertisement and begin to gut the property, I think you may have a hard time proving it was ever placed in service to begin with since it was never truly advertised with the intent to actually rent it out.

 
Thanks.