New GA landlord with tax questions

General Landlording & Rental Properties
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New GA landlord with tax questions

Silvia B.
Auburn, GA · Member since 2010 · 60 posts · 22 votes

After researching online and in landlording books I am still alittle confused about deductions / depreciations and business vs property owner. Can someone please tell me if I have this info correct?

Bought my first and only rental property in April. I do not have a business license. Did some repairs and the property was placed in service July 1. Unable to find the right tennant until Nov 1. Between July and Nov we took the opportunity to do some more repairs and replacements. I am actively involved in the property as I do the yard maintanence, etc. but am considered an investor rather than a business owner, according to the landlord tax classifications.

If I understand it corectly, and since it is not considered a business:
1. I cannot take the initial "business start up "deduction of $5000.
2. all repairs and supply costs from April to July need to be added to the initial cost basis and depreciated over 27.5yr.
3. all appliances, blinds, lights etc are depreciated from the July 1 "placed in service" date.
4. all supply,repair, maintanence costs after July 1 are deducted this year
Thanks in advance for any input...I'm a newbie at this so please be kind.

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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
15y

Mitch,

Sure it is a rental from the date of closing, But it is not in service as a rental until later, unless it came with a tenant. How much later on varies, but rehab and repairs until it is in service get capitalized rather than expensed.

Just what constitutes "in service" is also somewhat debateable. When you started advertising it "for rent"; when you started showing it to potential tenants (but they didn't fill out an application); when you received a tenant application (even one you rejected); when you received a certificate of occupancy. All of the preceding can be argued, and the order I have it could be a weakest to strongest position (I think).

I think what you described in your earlier post would have been costs that should have been capitalized IMO.

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  • Mitch Kronowit
    SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
    15y
    Originally posted by Silvia Barber:
    If I understand it corectly, and since it is not considered a business:
    1. I cannot take the initial "business start up "deduction of $5000.
    2. all repairs and supply costs from April to July need to be added to the initial cost basis and depreciated over 27.5yr.
    3. all appliances, blinds, lights etc are depreciated from the July 1 "placed in service" date.
    4. all supply,repair, maintanence costs after July 1 are deducted this year
    Thanks in advance for any input...I'm a newbie at this so please be kind.

    All good questions and fortunately ones your CPA should be able to answer in their sleep.

    1. Not sure if a "passive" real estate investor can take this deduction from the Small Business Jobs Act 2010 on their Schedule E. I do not think so, but definitely check with a CPA here.

    2., 3., & 4. You need to ask what repairs can be capitalized, i.e., added to your cost basis and depreciated, and which can be expensed (take the deduction for that year).

    When we rehabbed a property back in 2009, we deducted all the repairs since none of them were considered "capital" improvements, such as a new roof, room addition, etc. But once again, check with a CPA or tax professional and get their advice.

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  • Silvia B.
    OP
    Auburn, GA · Member since 2010 · 60 posts · 22 votes
    15y

    Mitch~ I think I read here somewhere that until the property was placed into service as a rental it is just considered my property and not a rental persay. That is why the costs before July need to be placed into the original cost basis of the property. (?) I've been trying to find that thread but I'll keep trying.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    15y

    Silvia,

    I think you got it right.

    Maybe Charles Perkins (a CPA) can chime in, or you can try messaging him.

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  • Mitch Kronowit
    SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
    15y
    Originally posted by Silvia Barber:
    Mitch~ I think I read here somewhere that until the property was placed into service as a rental it is just considered my property and not a rental persay.

    Probably correct, but when exactly does the property become a rental? As far as I'm concerned, it's the minute escrow closes and I'm the owner. Just because we're busy painting and cleaning doesn't mean it's NOT a rental. I would certainly like to hear from the professionals out there as well.

    BTW, if it were considered owner-occupied during the period between acquisition and leasing, then we should qualify for FHA, VA, and several other homebuyer programs, correct? :mrgreen:

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  • Silvia B.
    OP
    Auburn, GA · Member since 2010 · 60 posts · 22 votes
    15y
    Originally posted by Mitch Kronowit:
    Originally posted by Silvia Barber:
    Mitch~ I think I read here somewhere that until the property was placed into service as a rental it is just considered my property and not a rental persay.

    Probably correct, but when exactly does the property become a rental? As far as I'm concerned, it's the minute escrow closes and I'm the owner. Just because we're busy painting and cleaning doesn't mean it's NOT a rental. I would certainly like to hear from the professionals out there as well.

    BTW, if it were considered owner-occupied during the period between acquisition and leasing, then we should qualify for FHA, VA, and several other homebuyer programs, correct? :mrgreen:

    I think that would hold true if I was a business, since those expenses would be part of the business expenses. I think the problem lies in the fact that I am not a business, the house was purchased by me and remained vacant from purchase date to tennant moving in. Although I owned the property, I never lived in this home as it was purchased to be a rental property. I think this is why I must separate the costs from purchase date to date it was placed into service. Originally I had thought that it would all be considered the same but I just read something about it on this forum last night (unfortunatly I can't find that thread today). Thus my confusion. If this was a business (with a business license) it would not be as confusing but I didn't know that at the time. Still looking for guidance and a good CPA.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    15y

    Mitch,

    Sure it is a rental from the date of closing, But it is not in service as a rental until later, unless it came with a tenant. How much later on varies, but rehab and repairs until it is in service get capitalized rather than expensed.

    Just what constitutes "in service" is also somewhat debateable. When you started advertising it "for rent"; when you started showing it to potential tenants (but they didn't fill out an application); when you received a tenant application (even one you rejected); when you received a certificate of occupancy. All of the preceding can be argued, and the order I have it could be a weakest to strongest position (I think).

    I think what you described in your earlier post would have been costs that should have been capitalized IMO.

    1Reply
  • Mitch Kronowit
    SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
    15y

    You're right about a lot of this being a gray area, Steve. When we closed escrow on that house in 2009, a "For Rent" sign was placed in the front yard immediately. Sure, it needed to be cleaned and painted and have a few repairs done, but it was technically "available" for rent because 1) it was habitable and 2) there wasn't anybody else occupying the property. IOW, if somebody walked up that first day, said "I'll take it", and qualified as a tenant, they could have moved right in.

    I'll review it with our CPA again, but he didn't seem to have a problem with what we did. BTW, this brings up another question: When capitalizing improvements, do you count materials AND labor? If yes, what if you provide your own labor (DIY)? Do you get to add that to your cost basis? At what rate? And can labor be depreciated? I guess if it's part of the cost of building something, yes, but what if it's for installation or service?

    Alright, I'm confusing myself. Time for lunch.

    0Reply
  • Silvia B.
    OP
    Auburn, GA · Member since 2010 · 60 posts · 22 votes
    15y

    Mitch~ I don't think you can deduct your own labor, only what you pay out to someone else for their labor. My husband built a new front porch on the rental. It started out to be a repair but we found some rot and decided to replace it. The supplies will be depreciated but his time/labor cannot. I have been reading "Every Landlord's Tax Deduction Guide" for the past year and it has been very helpful with most things. But, yes, there are so many gray areas that it gets confusing at times. I really want to do whatever wil be best as far as IRS goes since they are the bottom line in returns.

    2Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    15y

    Mitch,

    If all you did was paint and minor things, then there probably isn't that big of a deal over expensing vs capitalizing. New roof, new windows, new bath, new kitchen, new HVAC - that all is definitely capitalized.

    You had a "for rent" sign, and you used that as placed into service, so I'd say you are then able to expense the things that the IRS considers repairs. It doesn't have to be completely finished to be "in service" IMO.

    As for your own labor, it is free, so you can capitalize it as $0 :D Or you can even expense it as $0 :D Doesn't make any difference! If you actually pay somebody for labor, then you either expense or capitalize that labor the same as the remainder of the project's materials: big ticket items are capitalized, and associated labor as well.

    1Reply
  • Mitch Kronowit
    SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
    15y
    Originally posted by Steve Babiak:
    If all you did was paint and minor things, then there probably isn't that big of a deal over expensing vs capitalizing. New roof, new windows, new bath, new kitchen, new HVAC - that all is definitely capitalized.

    Correct, Steve, we didn't replace anything big. Our biggest expenses were paint and landscaping. In total, we spent less than $5,000 on the rehab which is probably why our CPA regards expensing vs. capitalization as splitting hairs. :wink:

    Good to know. Thanks.

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  • Silvia B.
    OP
    Auburn, GA · Member since 2010 · 60 posts · 22 votes
    15y

    Steve~ In my situation: what about things like blinds and lights that were purchased before the place was placed into service.Do you think I can depreciate them over 5yrs from the date they were placed into service or do they have to go into the cost basis and depreciated over 27.5?

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