I am to bigger pockets member and have decided to get serious about investing into real estate. I have a question about tax deductions. I have had a rental property for 10 years , last year I invested $24, 000 into the property ( horrible tenants). During the Reno it remained vacant but was rented out for the last 2 months of 2017. My husband my does our taxes and he has informed me that we cannot deduct any of the $24,000 due to tax laws changes. Could someone please shed some light on this matter. I'm in the process of looking for an accountant to do our taxes.
Yes every cent of that $24k is tax deductible. The only difference is that some will be fully deducted in that tax year and some will be depreciated over the life of items. It depends if they are repairs or improvements. Make sure you have a list of everything you did when you take the stuff to you accountant
As with anything tax related, there are definitions that are a mile long so ask an account before filing but a repair would be replacing a heating element in an electric range or water heater or patching drywall. An improvement would be replacing the entire range of water heater.
As I said before u can still deduct the improvements but I believe it's over a 5 year period. Say a $500 range would allow u to deduct $100/yr for 5 years whereas a $125 repair to your existing appliance would be fully deductible year one.
It really depends. When you're talking with CPAs to see which one will work for you, ask them what they know about the De Minimus Safe Harbor election. If they blink at you or there is a moment of silences while you hear them furiously googling, then that CPA is not for you.
This election is going to be key to your particular question as most of your remodel ($24,000 indicates that it is mostly improvements, not repairs) will most likely technically be improvements. However, the election can allow you to recognize some of those improvements as repairs, so long as they are $2500 or less per line item.
So, for example, if you had to replace a countertop and the parts and labor to do the install is $1800, that would *usually* be considered as an improvement. However, if you properly make the election (and you do have to do some extra work to claim the election - this is not automatic), you can then elect to treat that improvement as a repair.
However, if your project is that you are replacing all of the flooring and parts and labor come to $3500, that item is not subject to the election and you must capitalize that. If it's carpet, that will be 7 years. If it's hard flooring such as tile or wood or vinyl planks, it will be 27.5 years.
So the answer to your $24,000 question is "it depends" and if/when you run into these types of issues, it will likely be worth it to turn over your tax preparation to a professional.
If your husband filed the taxes and the entire $24,000 is being depreciated instead of partially expensed, it is not technically "wrong", but it certainly isn't maximized.
Also remember, that for some people, it is NOT beneficial for them to be maximizing deductions and it may be better to have more long term depreciation than to expense up front.
While this is not legal advice, I'll say one can be VERY aggressive about expensing reno work as long as the checks are relatively small. The GOP has been defanging the IRS for years.
Below is a good podcast on improvements vs repairs. It makes me cringe when I see members depreciating things like appliances and items below the $2500 de minimis safe harbor. And then, having to face depreciation recapture later.
The DIY Landlord Book4.7247 Reviews