Are all reno costs part of the initial cost basis?

[Ken Hipp]

I bought a foreclosure(3 plex) in Feb. $55,000.  Renovated ($30,000) til May 1st when I rented it out. Are all reno costs part of the initial cost basis? I also did another $20,000 in siding, windows and roofing during the summer.

[Brandon Hall]

@Ken Hipp  @Dave Toelkes 

Costs incurred to place a property into service are capitalized. So yes, your renovation costs prior to renting out the house will be included in the cost basis and depreciated. 

There are two interesting rules that few know about and further understand. The first is the safe harbor rule for routine maintenance. It states that if tax payers reasonably believe they will need to conduct the same repair twice within ten years, they can expense the cost of the repair rather than capitalizing and depreciating it. (What is the estimated useful life of your windows and can you back that up?)

The second is the safe harbor for taxpayers with gross receipts of less than $10MM who own buildings which took effect Jan. 1, 2014. If you qualify, you are not required to capitalize improvements if the total amount paid for repairs, maintenance, improvements and similar activities during the year that are performed on the building does not exceed the lesser of $10,000 or two percent of the unadjusted basis of the building. No amount is deductible under the safe harbor for buildings if either limit is exceeded. This rule is applied separately to each building owned by the taxpayer. Since you spent over $10,000 in annual expenses on your building, you will not qualify, but the rule is important to keep in mind for future use.

Example: You own a rental with a $100k unadjusted basis. You incur plumbing costs of $200, carpet replacement costs of $800, and you replace two windows at a cost of $800. Under the safe harbor rule, you can expense the entire amount of $1,800 because you are below the threshold of $2,000 (2% of $100k).