Tax treatment of a tenant requested remodel

[Joe Taylor]

Hello everyone,

I'm seeking opinions on the tax treatment of remodeling in certain situations. For example, let's pretend I purchase a house for $90K, misc rehab is $10K, so I'm "all-in" rent-ready at $100K and advertised rent is $1K.  House is move-in ready and tenant would rather have a whirlpool tub and a double vanity, a bathroom redo costing $10K. Tenant intends to stay long-term and would pay an above-market rent.  So a few questions for the CPAs and others out there - 

(1) Being a new purchase would you just add the remodel to your cost basis or separately depreciate?  

(2) Would you take some deduction for the existing components (tub, vanity, etc) that were in good working condition yet were disposed?  Seems like a loss to me.  If so, how and how would you estimate the value?

Any other thoughts and experiences would be appreciated.

Thanks,

Joe

[Jake Hottenrott]

First of all, I probably wouldn't do it. But since we are playing in pretend world, I'll play along.

1- Since it was rent ready, I would depreciate the individual components as you replace them.  The reason being that it's much lower life and it was not included in the initial rent ready basis.  As an additional document to verify that it was rent ready for the IRS, I'd have a signed lease before I swung a hammer.

2- I'd depreciate the items replaced through their date of disposal.  Depending on if you sold them for cash, which would lower the loss (or pick up a gain potentially), you should take a loss on the disposition of the assets.  

Again, all this is hypothetical so I'd talk to a CPA about your real life situation.