All Forum Posts by: Wesley Emison

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

I have recently purchased a duplex and we will be renovating both units. I want to focus this discussion once I have completed the renovation what the useful lives I will be able to use on the different expenditures I have during the renovation. 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, (https://www.irs.gov/publications/p946/ch04.html#en_US_2013_publink1000107513) 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 is 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." 

Each of the below list is 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 sending by room).

I would like to be able to depreciate each of these expenditures of 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 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, 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).

@Sandra ReeseCan you elaborate more on what" getting into trouble" means when you said "I have seen investors get in trouble because they didn't have enough funds in the IRA to cover repairs after hurricane damaged the rental unit." I am curious what this means if 1) you a self-directed IRA with an investment property and 2) you have an expense that the SD-IRA needs to pay for and 3) that the expense/repair/whatever cannot be covered by the cash reserves within the SD-IRA and 4) you are at your contribution limit for the year. Does that mean you run the risk of needing to cover the expense with non-IRA money which would then cause the entire exercise to become taxable with penalties?

I think the obvious answer is to keep enough cash reserves on had, but I am wondering what the potential (extreme) downsides are to investing in an investment property within a SD-IRA.

@Jennifer S. One thing that I think you could do that will partially meet your goal is to invest through a SD-Roth IRA in an investment property, have that property generate enough cash flow to cover your initial contribution (and be financially self sufficient with adequate reserves in place) and at a later date withdrawal funds equal but not exceeding your contribution amount. That way, you have set up a non-taxable investment property, and get your initial contribution back (although you cannot use the cash flow generated above the contribution limits until you reach retirement age of 59 1/2). You can always withdrawal the Roth IRA funds you have contributed but once you withdrawal "earnings", that is when you get hit with taxes and the 10% penalty. If you are single, it may take you a few years to contribute enough to use as a down payment, since the contribution limit is $5,500 but if you are married you can accelerate this through contributing $11,000/ year and using you and your spouses SD-IRA's as joint owners of the property.

Please check my work here:@Brian Eastman@Dmitriy Fomichenko@Mark Nolan

Thanks everyone!

Since you were able to increase rent, can you just get them to sign a new lease?

You mentioned that you own a home- if you have some or enough equity in your house you could get a HLOC to make up the rest of the payment or to split it with the hard money. This may be a stretch to assume but with 100% financing I am assuming that you have calculated and planned for contingencies? What would happen if you use all of your liquidity on this property and there is a maintenance issues before you are able to build up reserves is a question we need to be aware of and comfortable with the answer.