CPA tax advice.

[Troy Smith]

I bought my first investment property under an LLC this year. The house was purchased in October and is still in rehab. I was told that since it's not "in service" that I won't be able to deduct my expenses. Could someone explain that to me or if there's anyway to deduct those expenses.

[Natalie Kolodij]

This is correct. 

The best way to think about it is you're in the business of renting a property-that business isn't operational until it's ready and available for rent (aka in service). 

So you don't have a business yet, and current deductions yet. 

Also -without an in service rental, you have no schedule on your tax return on which to deduct those expenses. 

Additionally, most of the costs to make an asset ready for it's intended business use are capitalized and part of the cost of the asset. 

Example: If a business buys an oven and it costs $5,000, and $1,000 for installation and setup, and $200 of delivery and transport fee. 

The business would have an asset it was able to depreciate in the amount of $6,200. 

As the tax code is concerned all of the costs to create your rental property business (buying it and making it usable for it's intended use) and one in the same. 

Keep track of those costs this year, they come into play in 2025 when it's in service. Some costs MAY qualify as startup costs if the rental rises to a qualifying trade or business level under 195 as well. (more legal fees, business fees vs. renovations).

Research Points: 
§1.263A-1T
§195(c)(1)





Ervin E. Mears v. Commissioner, (Tax Ct. 2013)