Deducting Rehab Costs

[Brad Z.]

When rehabbing a property, at what point do the expenses become tax deduction? I realize that it will raise your basis, which will effectively reduce your tax burden when you sell.


Here is an example. I bought a duplex for 8k and spent 12k rehabbing it in October. Can I deduct that 12k against other income since its under the 25k aloowable loss if my AGI is less than 100k? I have a meeting with my accountant this week so in preparation for the year end so I will know more then but wanted to see if I could get any insight on this board.

Here is one last question, lets say I have to replace a toilet next year, is that $100 expense deductable at that point or does it increase the cost basis?

[Jon Holdman]

Definitely into CPA territory here. I send mine a stack a receipts and rent data and a tax return comes back. So, take this with a grain of salt and find a good CPA. Taxes aren't a DIY game when you have questions like this.

Any dollar of expenditure either goes into your basis or is deductible or is capitalized. A dollar would never go into both your basis and be deductible. I believe everything you spend before you have it rent ready goes into the basis. Money you spend after its rent ready is either an expenses item (like repairing a toilet) and deductible in the year its incurred or is a capital item (like a roof) and is depreciated over multiple years.

Keep in mind everything that's in the basis is what goes into your 27.5 year depreciation, and the basis goes down by the depreciation each year.