Can you depreciate the new ARV

Question

Hello,

So I have completed my first BRRRR this year, and I have a question about what amount I can depreciate. I purchase the property for 27K cash with 15k being building value and 12k being land value. After our rehab the property was appraised at 52k. "Creating" 25k in property value, after it was rented we refinanced 38k out if it. So finally my question, so can I depreciate the newly created building value?

Thanks,

Chad

Eamonn McElroy · Answer

As others have stated, you're only allowed to depreciate what you have capitalized into basis.

Another way to think of this: are you allowed to capitalize and depreciate appreciation every year?  No, just like we can't capitalize and depreciate increases in value in a rehab beyond what was actually incurred.

Both are unrealized gains on the underlying asset which have no current tax effect.  The first from market supply/demand fundamentals, the second from asset repositioning.

Sam Shueh · Answer

Cost basis for home is $27K, Repair is expensed out from 1st year. My CPA will not allow improve and use that when time to sell.

Talk to your CPA.

Carl Fischer · Answer

@Chad Lamb

Improvements versus repairs is the key. Improvements get depreciated over time repairs get expensed the year you make them. Get with your cpa because there is some latitude in those declarations. Good work on the purchase and rehab -turning it into a moneymaker.

Chad Lamb · Answer

Thanks @Tom V. and @Ashish Acharya I figured as much!

Ashish Acharya · Answer

@Chad Lamb, I agree with @Tom V.

But remember you can depreciate the improvements that you made to this property as well. So, if you put 20k in the property, these improvements can be depreciated just as you would depreciate the house.

Tom V. · Answer

Nope.  Just your basis.