Claiming capital improvement done by property owner?

Question

Does anyone have suggestions on claiming rehab work done by property owners themselves as capital improvement expense? We are remodeling  the kitchen/ bathroom/roof of  a property purchased ourselves, but are not sure how to write it up as a capital improvement since there are no bills from the contractor .

Wayne Brooks · Answer

@Ella Depew you have to use the receipts for the materials you bought along with any costs you paid for contractors and subs for labor.  You can’t add anything for your own….the total will be “actual costs”.

Matt Devincenzo · Answer

This doesn't help you...assuming your entities are set up such that you can pay from one entity to yourself, you would be deducting costs on your rental saving your marginal tax rate (let's pretend you're at 10% for the example). You would then claim that income personally as income again at your marginal rate (10% from above), but you would also now need to pay self employment tax of 15%....thereby costing you more money than you thought you saved.

There are times where this may make sense to pay yourself for certain activities between entities, but it's mostly not going to help you. The way this benefits you is by making more total profit than if you had paid someone else to do that item of work for you.

Nathan Grabau · Answer

I am not a cpa, but the way I understand this is that capital improvements, and the cost associated with them, are actually removed from your taxable income through depreciation, not their immediate cost. If you think about a business that sells a specific product or uses a material input during the manufacturing process, that input is used and its product is sold, with income property we benefit from things like the labor associated with a bathroom remodel for a long time to come and the government stretches that out over time through depreciation.

If you are just flipping, it is not necessarily tax advantageous to claiming the cost of the rehab you put in as an expense for you business. You will just have to go from paying taxes on the business profits to your personal income, which should both be taxed the same way. Your time is worth associating a dollar value with though and tracking. As flippers scale, they tend to learn their time is best spent on deal flow.

Ella Depew · Answer

Thank you for the thorough clarification .I’m actually planning to rehab and rent out the unit. In that case, would I charge myself for the labor and depreciate from taxable income?

Claiming capital improvement done by property owner?

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