Here is a fictitious scenario. But can you (a tax pro out there) give me a real answer?
Say I bought a $10k condo that was trashed - stolen copper, destroyed carpet, holes in walls, etc. ALL this damage was done by a former tenant. And say I put another $10k into fixing it up. I put in everything basic - nothing fancy. It is NOT a high end property, so I put in laminate counter tops - not granite, basic carpet - not high end carpet, etc. And I restore the condo to its original condition, not a better condition than it formally was.
Can I write off those $10000 in repairs as “repairs” and NOT “improvements”…and depreciate it using accelerated depreciation? Or write it off in the same year? <<
The key thing is I restored the condo into its basic, original condition. Not a better condition. NOTE: I did NOT put on a new roof in this scenario - I am fairly sure standard roof replacements are always counted as improvements but I might be wrong.
The IRS has already anticipated this question and the answer is in IRS Pub 527.
As a general rule, repairs fix things that are broken and can be expensed. Improvements add to the value of the property or prolong its useful life and the cost is capitalized and recovered through depreciation over 27.5 years.
While a series of individual repairs might be needed to accomplish a larger renovation project, the IRS will aggregate an extensive series of repairs and consider it an improvement.
Let me ask you, what will the after repaired value of the property be when your project is finished. If you tell me anything more than $10K, then haven’t you added value to the property and made the case for the IRS that your extensive series of repairs was really an improvement project?
In regards to the ARV, $10k is what I ‘theoretically’ paid for a property because it included a significant discount of say 66% (lets assume the tax value of the property is $30k, and the ARV value is the same). So lets say after the repairs the value has remained at $30k, as I really did not increase the property value by just bringing it up to par. NOTE: lets also assume the tax office never knew the place was vandalized, therefore did not adjust any values down or up. My profit margin would be that 33% I saved by using affordable contractors or my own ‘sweat equity’, and my intention was/is to sell it for $29k - a little under market even - to get my cash fast and move onto the next deal.
:shocked “While a series of individual repairs might be needed to accomplish a larger renovation project, the IRS will aggregate an extensive series of repairs and consider it an improvement.”
WHY WOULD THEY DO THAT??? LOL. The key thing is - I used equivalent items to what was there before the damage. Or equivalent to what’s in the neighborhood, if I didn’t own the property prior to the damage. So I am replacing the same thing, with the same thing. So it’s not ‘technically’ improved…right??? Just repaired.
My understanding is that you can not expense anything until after the property is put into service. While those might have been repairs after a tenant had rented the property, they are not before the property is put into service and actually go against the basis of the property, being considered part of the purchase price.
I wouldn’t play “what-if” games with this. I’d get some professional advice. Do not take tax advice from me. I’m not a lawyer and I’m not an accountant.
the answer to the question “can I expense XXXX” is always yes,the answer to the question "will the IRS allow such if I am audited, the answer, based on the information give, is no according to my CPA
I just closed on a deal last week, and my CPA and I had a discussion on exactly what could be expensed for this year, since the property wasn’t in service yet, virtually nothing could be taken, just as Dave T said
I appreciate the desire to be aggressive on tax reduction, but bear in mind that when you go to get financing for your RE activities, they will look at the Sch. E income, and low income due to aggressive “repairs” will work to the detriment of your DTI ratios.
I agree that repairs done in a narrow window of time will likely be considered a “plan of improvement” that should be capitalized and depreciated.
During a workshop a few years ago the participants were told by the lawyer conducting the workshop that by Massachusetts Statute to do a REPAIR only a simple majority , 51 %, of the owneership needs to approve the project, but to do an IMPROVEMENT 75% of the owners need to approve the project.
It will just result in depreciation of your property, and i dont think you want it that way.
I think Mark Wagner & Furnished Owner are right on this one - in that scenario it would be smartest / best to classify the repairs as repairs. I just read two books on real estate taxes … and they said the same thing … and both were written by CPAs and one was a tax attorney even.
Thanks for all the feedback guys! Even from the guys who disagree! =)