Tax deductions & "Brrrr-ish"

5 Replies

We purchased a property that requires some rehab and repairs with the intent to use it as a rental. This will be under my personal name (sole proprietorship). 

I had originally thought, "I'll figure out the tax stuff later," however I'm going to be doing a decent amount of the work myself and want to track the expenses related to the property. 

For tax purposes, do you account for the purchase price plus the repairs as part of the "total purchase price" and then depreciate? Or do you depreciate based on the initial purchase price? I'm not sure we'll be doing a cash out refi on this and it is my first rental property. Repairs are likely to come in at about 50% of what we paid for the property initially. 

If anyone has links to posts or explanations on this part of the process it would be greatly appreciated. (Not sure what to throw into the search engine.) 

Chris, talk to your CPA. They can tell you what can be expensed and what needs to be capitalized.

What I have done in the past is I create a breakdown of all repairs and the cost associated with them and I give it to my CPA. He then tells me "you can expense xyz" or "this needs to be capitalized." 

Your CPA will keep up with the depreciation schedule for the capitalized items: Roof is x years, while HVAC is y years, and hot water heater is z years.

If you don't have a CPA, that is a good first place to start. And find one that also has investment properties. 

@Christopher Abele , seems like a pretty big project! The biggest thing to be aware of with your situation is that the asset isn't being placed into service (unless a tenant is living there). So, you'll want to keep track of your initial basis and then add in the repairs/improvements to your basis. I would recommend keeping track of items such as appliances and land improvements separately as those items have faster depreciation (and eligible for bonus depreciation)

Example: purchase price is $200k. Of that, 80% is building (depreciable); 20% is land. Therefore, $160k is depreciable, remaining 40k is not depreciable. Then, let's say you have an $100k rehab. That would also be eligible to be depreciated. 

The date you place your asset into service can be the date you first advertise for rental. You can not place the asset into service until then as you are still completing the rehab. 

I would definitely heed Scott's advise about getting/talking with a CPA. 

Thanks @Scott Ashworth & @Aaron Zimmerman

As this is our first property, we are not running things through a CPA (yet). At least for property #1, my thinking for now is to document all purchases (storing invoices, tracking numbers for invoices and keeping a detailed list of what was purchased). 

It was a little unclear, for example, if "flooring" counts towards the purchase price (depreciable) or a one-time repair cost. 

If before the asset is placed into service, then it is depreciable and therefore added to the purchase price. Typically flooring is an improvement. 

@Christopher Abele That is why I would recommend reaching out to a CPA. My CPA told me $2,500 is a threshold to keep expenses under...however, some things must be capitalized (like utilities while fixing up the property, a construction dumpster, or if you are replacing all the lights in the house even if it's under the $2,500 threshold). I'd strongly recommend spending the $200/hour or whatever it costs to give you rundown on "rule of thumb" advice for your situation/state.