1. Bought a SF house for $25k on Dec. 3rd, 2008.
2. Lets say Land is 10K and existing bldg is $14k and closing costs are 1k.
Let’s say that your county tax assessor says the land is valued at 12K and the structure is valued at 48K, for a total tax assessed value of $60K. Since you paid only $25K for the property, allocate your purchase price between land and improvements in the same ratio that the tax assessor used. Since the assessor has allocated 20% of the value of the property to the land, you should do the same. So, for your $25K initial cost basis, allocate $5K to the land and $20K to the building.
[b]3. I will be spending $8k for improvements and $8k in repairs in 2008.
4. I will spend another $9k in repairs and $9k in improvements in 2009.
- The rental wont be “ready to rent” till Feb 15th, 2009. * so what happens to all expenses in 2008?[/b]
If you are equating “expenses” to tax deductions, you don’t have many. You can take a Schedule A deduction for the amount you paid for mortgage interest and property taxes in 2008. You are repairing and rehabbing to make your property ready for rental use. Whatever money you spend in 2008 and 2009 to get your property “rent ready” is an adjustment to basis. That is, you add those costs to your basis for depreciation – you don’t get to expense them on your tax return.
i) is the Land at 10k an expense for 2008? (since land cannot be depreciated, it is an expense now right or land is not even considered an expense at all ever??)
No, land is never an expense. It is a capital asset. You simply exchanged one capital asset (cash) for another capital asset (land). Presumably, you could exchange the land back into cash (i.e. sell the property). Still not an expense.
ii) the $8k in repairs and $1k in closing all 100% expenses for 2008?
No, you can take a deduction for mortgage interest and property taxes you paid in 2008. Everything else is added to the cost basis for the property.
iii) any depreciation I can take in 2008?
No. Depreciation does not start until your property is placed in service as a rental – Feb 2009 on your timetable.
iv) what can i do to show more expenses in 2008? the best I can think is to buy materials now before 12/31/08.
Once again, whatever you spend to make the property rent ready is an adjustment to your cost basis and not a deductible expense.
p.s. I will also be clsoing on another rental house in 2008 but wont do anything to it till 2009 (just hold it). Any expenses / depreciation I can take in 2008?
The situation is the same for this property, too. No depreciation until the property is placed in service as a rental. No expense deductions for repair or rehab to make the property ready for rental use. You can deduct whatever you pay for mortgage interest and property taxes in 2008 as an investment expense on Schedule A.
Once you get your property ready to rent, you need to calculate your depreciation basis. Using our example for allocating the purchase price between land and improvements, you start with a depreciation basis of $20K. Since your projected rehab costs for 2008 and 2009 total $34K, you add that to the cost of the improvement to get a depreciation basis of $54K.
Once your property is in service as a rental, repairs become deductible expenses on Schedule E. Until then, your repairs are really part of a larger rehab project and everything is all lumped together as a capital improvement.
