I still have to find an accountant but in the mind time, I hope soemone can answer my question. We are in the process of rehabbing a large triplex. At the end of 2005, we have about $12000 in receipts from Home Depot and Lowes. They consist of tools and materials to fix the house. We basically ripped everything out of the house and replace it (dry rotted walls, replaced the electrical, etc …).
A friend accountant said certain things can be written off, and NOT the whole $12000.
I’m not an accountant, but generally speaking, if it’s a “repair,” you can expense the cost now. If it’s a “replacement,” you are supposed to write it off over time by adding the cost to the basis of the property, then depreciating it over time.
Of course, there’s a blur sometimes between repairing and replacing.
As for tools, you can’t just expense those because (hopefully) they have a useful life beyond the year in which you bought them. However, you can use Sec. 179 to depreciate them 100% in the current year (usually), up to a pretty decent amount. It used to be like $17,500 but I think this number has gone way up.
What are you going to do with the triplex when you finish the rehab?
As a general rule, rehab costs are adjustments to the basis as a capital improvement. Even though a rehab may consist of several repairs, when they are really components of a larger project, the whole rehab project becomes a capital improvement.
Dave’s got it right.
Everything of the $12,000 is a legitimate business expense and is deducted somewhere; either from this year’s profit (tools) or from the gain when sold (materials).
Mark Wagner, CPA