Taxing of Capital Expenditure Funds in LLC

[Todd Magin]

How is the capex reserve fund handled tax-wise in an LLC (or S-Corp)?

Over the year, a portion of the rental proceeds are siphoned off into an account for future upgrades (roof, furnace, rehab, etc). Does that count as a business expense even though the actual upgrade is in a future year? Or do you pay taxes on those funds and take the deduction when the actual expense occurs?

[Brian Adams]

@Todd Magin, for capex reserves the rental proceeds are not siphoned off.

What happens is most lenders require a minimum of $250 per door for capex. I buy 100 to 400 unit deals so let's say on a 200 unit deal the capex reserve is $50k ($250 x 200 units) or $4166 a month. The $4166, along with your mortgage payment and other reserves like taxes and insurance are paid from operating cash flows.

This capex reserve NEVER hits the P&L it is 100% recorded to the balance sheet. (Sorry my inner CPA speaking to you).

To get the money back from the lender and after you complete a capex project, you submit invoices and cancelled checks to the lender. Some lenders will send a reimbursement via check, ACH or wire right away. Other lenders might send a 3rd party inspector to confirm you actually did the work. This could delay you getting your reimbursement back.

Hope the above is helpful to you.