Accounting Questions

[Scott Bartlett]

I've done a few searches here, and I think I have a pretty good idea of what I need to do.

I purchased my first rental property about 45 Days ago and I'm still renovating the property.

I purchased the distressed REO Property for $8,750 with $649.03 in closing costs, bringing total purchase price to $9399.03.

This property was in pretty bad shape and was not rentable. My question was, what can I expense and what do I have to capitalize?

From what I've read here, EVERY PURCHASE/IMPROVEMENT I complete before listing the property to be rent has to be capitalized. I'm assuming this is correct?

Things I've done is rented (2) 10 Cubic Yard Dumpsters, replaced the front porch, gutted the entire upstairs, put drywall throughout 75% of the property, rewired the electrical systems, re-coated the metal roof, landscaping and etc.

So EVERYTHING I purchased for the property such as materials, small tools such as pry-bars, drywall knife and etc must be capitalized or just the MATERIALS used for the improvements? The tools that were purchased were solely used to complete such projects.

The costs I incurred before I purchased the property such as inspections and etc would be expensed since I did not own the property at the time and was a routine business expense while investigating/inspecting properties?

So would the gas that I used to mow the grass be capitalized since the property isn't Rent Ready.

Lastly, do I add a "Capital Improvements" category account to my property under Assets for my accounting?

[Steven Hamilton II]

Hello Scott Bartlett,

This is where tax and accounting get fun. My favorite topics :)

Dawn A. is correct in that your lawn mower and tools etc, would not be added into the home's basis; however, they would have their own that must be depreciated separately. It is distinctly possible these were placed in service before the property was.

Tools such as a lawn mower and snow blower would be 5 year property. Item such as a screw driver and drill bits would be immaterial and deducted as an expense.

Costs for inspections are added to the cost basis of the home.

The fuel to maintain would also be capitalized until the home is "placed in service" (Rent ready and available for rent).

Keep track of your improvements separately. If you replace floors we want to depreciate that over 5 years as opposed to 27.5.

Things I've done is rented (2) 10 Cubic Yard Dumpsters, Add to basis
replaced the front porch, Depreciate separately 27.5 years
gutted the entire upstairs, Depreciate separately 27.5 years/ add to basis.
put drywall throughout 75% of the property, Depreciate separately 27.5 years
rewired the electrical systems, Depreciate separately 27.5 years
re-coated the metal roof, Depreciate separately 27.5 years
landscaping and etc. depreciate separately.

-Steven