Bought in 2021, rehab in 2022. Tax handling?

[Stephen Lynch]

Hello,

I purchased a duplex in November of 2021, we've made some small repairs but it was mostly about getting the tenants out so we could start the rehab (scheduled for January). 

For 2021, I know it would be pretty easy to just do all the standard stuff for taxes (depreciate 27.5 of property, repairs, closing costs etc.).

My question is for 2022 after I do the rehab do I simply adjust the depreciation schedule based on the new appraised value, closing costs etc  over 27.5 years thereafter?

Thanks!

[Ashish Acharya]

Originally posted by @Stephen Lynch:

Hello,

I purchased a duplex in November of 2021, we've made some small repairs but it was mostly about getting the tenants out so we could start the rehab (scheduled for January). 

For 2021, I know it would be pretty easy to just do all the standard stuff for taxes (depreciate 27.5 of property, repairs, closing costs etc.).

My question is for 2022 after I do the rehab do I simply adjust the depreciation schedule based on the new appraised value, closing costs etc  over 27.5 years thereafter?

Thanks!

No, you never depreciate the asset at the FMV. Your depreciation is based on the historical cost. The Rehab expense, if capitalized, would be depreciated as new assets in 2022. You don't change the 2021 depreciation schedule for the old asset.

Talk to your tax advisor if you could deduct the expense rather than depreciating it and if doing so would be beneficial/allowed for you.