Tax deductible? - tenants rented for a month while I started capital improvements -

[Ayoka Moss]

Hi, 

I just want to understand if I bought a property (quad) and received rent while I started the capital improvements .. can I deduct the expenses of the rehab still? This was a major rehab over 6 figures.  Ty and happy to answer more questions.   

[Jason Malabute]

Yes, you can still deduct the expenses of the rehab even if you received rent before starting the capital improvements. The fact that it’s a major rehab over six figures makes it worth considering a cost segregation study. This could allow you to take advantage of bonus depreciation, which can significantly accelerate the depreciation deductions in the year you place the property into service

[Ayoka Moss]

Thank you,Jason! I bought it in 2022 for $155k and finished the rehab early 2023.The rehab was about 360K all in and appraised for $825K upon completion. Would I still be able to cost seg on this now? I totally appreciate all of your insight.  

[Joshua Thompson]

Hi Ayoka!

Certain cost might need to be capitalized and depreciated over time and given the rehab was over $100,000 I'm sure there will be a few large transactions that need to be capitalized. However, with the property being placed into service it does help your case to allow for certain expenses to be deducted in the current year. Depending on your situation it might be better to elect to capitalize on all rehab expenses and a great conversation to have with your tax professional

[Malik Javed]

Quote from @Jason Malabute:

Yes, you can still deduct the expenses of the rehab even if you received rent before starting the capital improvements. The fact that it’s a major rehab over six figures makes it worth considering a cost segregation study. This could allow you to take advantage of bonus depreciation, which can significantly accelerate the depreciation deductions in the year you place the property into service

If you're considering a Cost Segregation study, here are a few things to consider:

https://www.biggerpockets.com/forums/51/topics/1206189-cost-...

Feel free to reach out with questions!

[Andrew Strauss]

Hi Ayoka - You can deduct expenses but you might have to capitalize it. You can take advantage of bonus depreciation and sec 179 (if qualified).

[Michael Plaks]

Quote from @Ayoka Moss:

I just want to understand if I bought a property (quad) and received rent while I started the capital improvements .. can I deduct the expenses of the rehab still? This was a major rehab over 6 figures.  

Good part: if you received rent before starting the rehab, your property was "placed in service" so you can start deducting some expenses and depreciation. 

Bad part: you can never deduct the cost of the rehab itself, whether it was $20k or $200k. You can break out and deduct some parts of the rehab (appliances and carpets for example) but will have to slowly depreciate the rest of it. Here is an intro to depreciation:
https://www.biggerpockets.com/forums/51/topics/1121063-expla...

Also, cost segregation refers to analyzing what you bought already - the $155k part. It is based on estimates. Your $360k rehab does not need cost segregation, it needs a careful separation of what actually went into the rehab. Similar to cost segregation but based on real expenses instead of estimates.

[Account Closed]

Quote from @Ayoka Moss:

Hi, 

I just want to understand if I bought a property (quad) and received rent while I started the capital improvements .. can I deduct the expenses of the rehab still? This was a major rehab over 6 figures.  Ty and happy to answer more questions.   

Hello Ayoka, 

You can deduct certain expenses related to the rehab of the property, but how you deduct them depends on the nature of the expenses. Since this was a major rehab with costs exceeding six figures, most of these expenses would likely be considered capital improvements. Capital improvements are not immediately deductible as repairs; instead, they must be added to the property's cost basis and depreciated over the property's useful life. However, some costs like repairs, maintenance, and certain other operating expenses incurred while the property is being rented out can be deducted in the year they are incurred. You might also consider using cost segregation to accelerate depreciation on certain components of the property, especially given the significant rehab costs.

[Ashish Acharya]

Yes, you can still deduct the capital improvement expenses, but they must be capitalized and depreciated over time, typically over 27.5 years for residential rental properties. Receiving rent while starting the rehab doesn't affect the ability to deduct these expenses, but you cannot deduct them all at once. Repairs and maintenance can be deducted in the year they occur, but major improvements must be depreciated.