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Updated about 17 years ago on .
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Depreciation on Fixup
Hi, Purchased a foreclosed property, ready to rent n 10/15/07
I redid most things...
Here is how I planned on depreciating, but called IRS to ask a question, and they seemed to imply that all of these should be added into value of the house and depreciated over 27.5, but I'm not sure we were communicationg effectively.
Obviously I would prefer 5-7?
Question # 1 --- Which is right.
Kitchen Cabinets - 5 or 27.5
New laminated floors (on top of old hardwood) - 5 or 27.5
Redo Bathroom (drywall one wall, new vanity/mirror/toilet/shower) - 5 or 27.5
New Shed in backyard - 5 or 7 or 27.5
References
Page 31 of Pub 946 - http://www.irs.gov/pub/irs-pdf/p946.pdf
Page 3 of Pub 527 - http://www.irs.gov/pub/irs-pdf/p527.pdf
All seem to agree these should be 27.5
Sewer Line
Windows
Water Heater
Furnace
Plumbing System
Question # 2 - I got a mortgage on a rental condo I owned to pay for this rental home.
I assume the mortgage costs go towards the condo rental property (not the home).. If I've already been depreciating the condo for the past 5 years, how do I depreciate the legal fees, appraisal, loan costs etc.. (I think they go towards the full 27.5 cost of the condo.. but I already started that 5 years ago)
Do i need to start a separate depreciation category for 27.5 years, which would go 5 years beyond the actual depreciation of the condo?
Casey,
You really should take this to a CPA and spend a couple hundred bucks. You will gain much more then you will spend.
My accountant told me something different than the IRS, that's why I'm looking to a third source.
I pay a tax accountant to go over my return with me after I'm done for 3 reasons.
# 1 - If I do it myself, I understand and make tax wise financial decisions through the year.
# 2 My tax bill with them preparing would be over $1000.
# 3 Despite trying several accountants, I frankly have been unimpressed.
One told me I didn't have to collect sales tax on short term rentals, One told me I could use 179 on a rental properties. There were two other mistakes I can't recall off the top of my head.
So If I would rather them double check my work, than me double check their work.. I learn more and it's much cheaper.
Casey:
Sounds like you are in a pickle of sorts. Since the IRS' authority trumps that of the advice from a CPA, I would get the IRS to send me the information on your question in writing. This way you have something to back yourself up with.
Also, have you explained to them that your CPA told you something different?
In the end, if you utilize your CPA"s advice and get audited, the IRS will place the burden on you to prove you handled your financials correctly, not your CPA.
In regards to the improvments you made on the foreclosure property. Anything you did prior to the property being ready to rent, are considered part of the basis for your property being put into use for earning income. Since all of these repairs appear to have been needed to make it habitable, the IRS is correct in saying they should be lumped with your purchase price, and depreciated over 27.5 years.
If a year from now if you remodel a bathroom, then that would be depreciated over 5 years seperate from your original purchase/rehab costs.
The loan you obtained on your original rental condo, is attached to that rental property. Loan costs on rental property is depreciated over the life of the loan, NOT the life of the property. So if it is a 30 year loan, then you depreciate straight-line 1/30 of the cost each year.
BMR
I have a related question. When is a property put into service. Say I purchase a rental house 12/15/06, spend two months and $7500 on re-hab/major improvements, property is available to rent 2/15/07, property is rented 3/1/07.
I would like add cost of rehab to basis and begin depreciating both on an "in-service" date of 2/15/07. Problem with this is what is the property considered between purchase and rent-ready? Personal use?? If that's the case then I have to split up taxes, insurance, ect. between personal and business use. It might be correct to consider the property to be in service on date of purchase since it was always intended to be a rental, and put the rehab cost in service on date of rental and depreciate it separately -- but it's my understanding that it should be included in the basis. If I did this, then I should have filed a Sched E for 2006 even though the property wasn't ready to rent (which I didn't)
Also, insurance, for example was paid in 06, so how can I claim it on the 07 Schedule E -- seems like I should be able to claim everything I spent on insurance since the property was never anything other than a rental.
Arrrg, I don't mind paying taxes nearly so much as I hate figuring them out!
Rental is definitely put into service 2/17. During the time from purchase to in service date, it's just a house you own, and all costs go to the accumulating capital asset account that you have for it. In regards to insurance, taxes, etc, you can prorate them accordingly, by creating something like a fake escrow account, but for simplicity i just record them for what they were at the time of the expense. It is just easier.
Basically everything you spend prior to putting it into use is not considered an expense.
BMR
BMR, I agree that the in-service date should definietly be the date it became available, but I'm still confused about the accounting. What do you mean by "capital asset account"? Perhaps the total of all the start-up costs (not counting actual inprovements)? And would that be claimed as an "other" expense on Sched E? or depreciated separately? Thanks. I'd also be interested in talking to you about ICFP -- are you Jason?
JMac
Jmac,
I was referring to however you track your bookkeeping of the property. Until you actually do something with the property, i.e. put it into business use, you can't deduct anything as a business expense on it. So you just keep adding your costs into a big total. After it is put into use, then you start depreciating the total cost over 27.5 years.
Probably the best thing for you to do is print off IRS Publication 527, and then also just try to search on the internet for "rental depreciation" and you can pick up what you need to know.
I will PM you about Indiana Cash Flow Properties.
BMR
So I think BMR's followup question answered my first...
My ready to rent date was 10/15...
anything before that date goes on the 27.5 years cost basis. Right?
including, Shed, Plumbing, Driving Miles back and forth to home, lawn-mowing, Insurance, Sewer Scope, etc...
Originally posted by "caseynshan":
My ready to rent date was 10/15...
anything before that date goes on the 27.5 years cost basis. Right?
including, Shed, Plumbing, Driving Miles back and forth to home, lawn-mowing, Insurance, Sewer Scope, etc...
bingo!
Originally posted by "BMR":
Originally posted by "caseynshan":
My ready to rent date was 10/15...
anything before that date goes on the 27.5 years cost basis. Right?
including, Shed, Plumbing, Driving Miles back and forth to home, lawn-mowing, Insurance, Sewer Scope, etc...
bingo!
BMR,
I can't believe this is correct. Although, my CPA is not finished with my tax return, so I could be in for a big surprise. If I am driving my truck for business purposes, whether I am going to a rehab or rented rental property, those miles have to be deductable.
I am not an accountant, ... but if the driving cost is tied to this specific not-in-use property, it's not depreciated until the property is ready to rent. Once it is ready to rent, then driving after that point would be expensed. Anything before that point is depreciated.
This all changes if you are in the flipping business where your properties are like inventory to be resold. Then you would expense it all as a cost of good sold transaction, when the property is actually sold ...
My general guideline is if I cannot come to conservative confidence with myself about what I am doing, via what I learn through Turbotax and reading IRS guidelines , then an accountant is a must ...
BMR
Just got off the phone with IRS and they seemed to disgree with BMR's statements above...but it may be I didn't ask well...
Property purchased in July 07
Property ready to rent Oct 15 07
Expenses in Sept 07 and how to book according to IRS today...
Mileage & Utilities - Not deductible anywhere
Flooring - Into 27.5 house cost basis
Appliances - Normal depreciation (5 years as of 10/15)
What do you mean, mileage and utilities not deductible anywhere?
Mileage and Utilities before the house was placed "in service" to rent are???
IRS says - "Not deductible at all". I asked.. so you are saying those are costs I eat with no deduction? answer "Yes"
My accountant disagrees.. he says they are expenses...
Tthis book says they should get rolled into Cost Basis of the house..
sample Bottom of page 161
http://books.google.com/books?id=Tz-AfKLCbtUC&pg=PT78&lpg=PT78&dq=rental+expenses+start+up+before+service&source=web&ots=Ht32crMTZ5&sig=qmTopLeRGgvPBWyYIoH4afvOJ70&hl=en#PPT80,M1
This is what is wrong with our Tax System.. Three phone calls to the IRS, Three Forum Posts, Two emails to my accountant, and I still have no idea how to book expense before my rental was in service.
casey,
I would go with what the accountant says. If you own a business, I don't care if you are running down to the local hardware, if it is for business purposes, that mileage is deductable. It should not matter if you are rehabbing a house or cutting folks grass for a living.
Went and reat part of "Every Landlord's Tax Deduction Guide".
It states than non-depreciable/non-inprovement items like utilities and travel should be filed in this year as special "Section 195" expense which is not to exceed 5000 (or it can be spread out between 5000-50000)
I think you are looking at it strictly from a landlording deduction. It is not, it is a business deduction.