All Forum Posts by: Wesley Emison

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I recently purchased this smart meter which is connected via cell signal and gives real time down to the minute usage. I hope to be able to recommend it, I came to BP looking for answers to "my water problem". I bought the "Flowei-o" but it wasn't cheap - they market to multi large parcel commercial buildings. 

@Ryan Moore response to: "why would anyone even consider a money market at 0.9%-1.0% and CDs that are <1.75%". I am putting a deposit down with my local utility company. That deposit either will sit with them at 0.19% or I can get the highest CD rate I can and assign my local utility district that CD through the use of their form. That's what brought me to this tread and is the reason I'm considering a CD because I'm not going to settle for 0.19% on my deposit if I don't have to.

But what is the  tax code depreciation for mobile homes? @Natalie Kolodij . Still take out land value and depreciate over 27.5 years? I doubt it would be cost efficient to get a cost segregation study done right? @Paul Caputo. Say if you spend $100K on 8 mobile homes, by the time you take out the land and the hookups there is basically nothing left to depreciate is my understanding.

@Susan Maneck It's really hard to say just purely based on the information you provided but I would anticipate that because you only paid $35K for a house (assuming you did not put any money into the house in capex) that there would be very little to depreciation that would economically be able to be accelerated. You can only depreciate the building, not the land. So, for easy math let's assume the land is worth $7.5K and you have $27.5K of depreciable assets. There really is not going to be that much benefit of accelerating the depreciation in your case because there is not that much to accelerate. You have to pay for the study to be performed and I would anticipate that it would be very difficult to justify that expense given the low basis you already have. But it's not all bad news. Hopefully that means you got a really good deal on the property! In @Billie Miller's case she/they have a much higher depreciable base. In your $27.5K depreciable base, over 27.5 years - you would only have $1,000 of depreciation a year. In the Miller's situation they would have (assuming $24K of land value for easy math) $10,000 of depreciation a year ($275,000 straight line over 27.5 years). Now, if the Miller's are able to pay to have a cost segregation study performed and able to get 20% of their depreciable base into the 5 year bucket, 2% into the 7 year bucket and 20% into the 15 year bucket (wild examples that are not benchmarks, just using for this discussion) then that would accelerate a massive amount of depreciation and (depending on a lot of other factors) could allow them to legally claim a loss on their personal/applicable returns in the first 5-7 years (guessing) even though they may be actually cash flowing and having the tenants pay down the mortgage. Of course, there is a trade off with this which is that any depreciation accelerated is taken away from later years - but there are strategies for that as well; see 1031 exchange. There is no one solution to what the right answer is for you. All that being said, cost segregation studies are a valuable tool to be used in RE investing (particularly when there s a renovation) but for a $35K investment it may not be economically justified to pursue.

$114/month for taxes? No way! (at least in the first few years) You should consider paying for a cost segregation study to be performed and accelerate the depreciation. I believe you could even catch up on missed out on depreciation and flow that through to yourselves and the partners in the deal! (depending on entity structure, assuming they are equity partners since you mentioned capital gains sharing later). Better yet, if you have receipts of all of the remodel that you did then you should be able to provide that to the cost segregation expert and they should be able to provide you with the amount of the $299,000 that you/your business "abandoned" (assuming you removed anything from the property that you purchased during your remodel) and should be able to write off of the original investment (seriously a massive write off in some cases..like if you ripped out bathrooms and refloored the house or new windows or whatever...your tax accountant will know more). Don't forget to track and deduct your mileage (including trips to your remodel store of choice, assuming you own a car that you use(d) to conduct business with), deduct a portion of your cell phone (assuming you conduct business on your phone) and deduct a home office expense (assuming you conduct your property management out of a room in your house) and consult a tax accountant to see what other tax write offs you should be able to have. I put all this out there, while am I not a tax accountant, to share that you could actually be able to benefit from your tax position from this remodel (for a first initial years) instead of planning on paying taxes. The government wants you to do exactly what you did so they incentive it! Apologies if you have already considered all these things and still have to pay but I find that unlikely if you have the study done and accelerate as much depreciation as legally possible. Also - congrats on the remodel! 

@Chris Eaker thanks for the tip!

I'd like to add one more wrinkle to this conversation. Without figures, this is my scenario. I have a 1st mortgage on my house and I also have a HELOC with an outstanding balance. I am currently under contract to purchase another house that I am going to move into as my primary residence. The timeline is that I am going to purchase my next primary residence on 10/31, move on 11/11 and then put my current home (the one with the HELOC) on the market to sell it hopefully by 11/21.

I know I have to pay back the HELOC with the proceeds of the sale of my current home. My question is the timing. If I move into my next primary residence and no longer occupy mu current home (the one with the HELOC) for a period of time of 2 months or so while I have it on the market to sell, will the bank still allow me to use it during the time period that I am not living in it? If not, that's fine, I just don't want them to ask me to pay it back before my home sells because I am no loner living in it as my primary residence. Furthermore, I am going to need to tell the bank I have a HELOC with about the move before I sell my home with the HELOC on it because I need to change my mailing address when moving into our second primary residence.

Thanks for clarifying my worry about the timing of selling my first home with a HELOC on it after I move out for hopefully only a few months.

Thank you Steven. So, I think my best course of action is to have my contractor itemize each of the rooms I have in questions so that I can determine which individual components can be accelerated. For example, I think that the floors and lighting fixtures in the bedrooms I am installing can be accelerated but the ceiling and walls cannot be.

Please elaborate on your comment on bonus depreciation if you do not mind to do so. 

I hope my contractor does not mind breaking down his labor and profit into each of the components in each of the rooms. I don't think it is a deal breaker but it is probably more than he had envisioned sharing.

Appreciated,

Wes.

I have moved this discussion to the appropriate section of the website - this post can be followed under the Tax, Legal Issues, Contracts, Self-Directed IRA forum at

https://www.biggerpockets.com/forums/51/topics/345017-tax-impact-of-renovations-on-a-duplex---useful-lives

Hello BP Community, thank you in advance for reading my questions and providing me with your thoughts.

I have recently purchased a duplex and will be renovating both units. I want to focus this discussion on what useful lives I will be able to use on the different expenditures I have during the renovation, once I have completed the renovation and placed in service. All in, we are spending about $50K on the renovation and hitting high value items like kitchens, bathrooms, appliances, lighting, paint and trim, etc.

In section 946 of the tax code, there is a run down of what useful lives you can use when you spend capital on a residential rental property. Generally, appliances and other personal property are in the 5 year useful life bucket and land related upgrades are in the 15 year useful life category. Both are great because it is quicker than the 27.5 years you otherwise would use a a depreciation timeline for those costs. What my question focuses on is the 7 year useful life category, which is partially defined as "Any property that does not have a class life and has not been designated by law as being in any other class."

https://www.irs.gov/publications/p946/ch04.html#en_US_2013_publink1000107513

Each of the expenditures in the below list is based on actual dollars spent by area. My contractor broke down his bill/quote so that I could more easily allocate costs for depreciation purposes (among other benefits of knowing what I am spending by room).

I would like to be able to depreciate each of these expenditures over 7 years but I am not sure if I am allowed to (with the consequential answer placing these depreciation dollars into a 27.5 year bucket):

Screened in Patio: $4,798 - we are destroying a room and turning into a nice screened in patio.

Bedroom renovations: $7,888 - updating bedrooms with new drywall, removing and replacing ceilings, light fixtures, building additional closet space, paint, trim, etc.

Entry way: $4,308 - the shared entry way is a mess right now. We are taking down and replacing all of the drywall, replacing the treads and risers on the stairs and this includes paint, trim, lighting, etc.

Laundry/mudroom renovations: $4,461 - similar to the above, drywall, paint, trim, flooring, some small interior wall changes to closets, etc.

Dining/living rooms: $6,835 - the trend continues except here we are also installing flooring. Drywall, lighting, pain, trim, etc.

Bathroom renovations: $10,731 - complete gut and refinish three bathrooms. Taking each room down to the studs and replacing all finishes, electrical and plumbing, lighting, walls, paint, trim, tile, etc.

Kitchen renovations (excluding separately purchased cabinets): $2,719 - Some electrical work, paint, trim, lighting, etc.

If I am allowed to place all $41,740 in the 7 year bucket, as opposed to the 27.5 year bucket, then I am looking at a year 1 after tax savings of ~$6.4K from depreciation, compared with ~$3.9K in the less favorable scenario. That is a year 1 cash return of difference of ~$2.5K that I am trying to figure out if I get to keep.

Again, I appreciate your input. I understand this is a complicated matter and I am seeking professional advice. I have found BP input very helpful in many questions I've had; I just couldn't find a thread that discussed this type of question.

Wes - Multifamily Real Estate Investor in the Knoxville, TN area (feel free to connect with me if you are in the area or share the same interest).