Are all costs prior to placing a tenant considered purchase cost?

[Chris Sullens]

So an experienced CPA recently told me that essentially all costs incurred prior to placing a tenant are considered to be acquisition costs and get written off only as depreciation. Is this true? I'm sure he knows what he is talking about, but I wanted some second opinions. Are there any expenses that are directly tax deductible which are incurred prior to placing a tenant? Or are all expenses taken as depreciation? This includes closing costs? Interest on mortgage payments? Utility bills? All rehab expenses? Everything? 

[Linda Weygant]

Originally posted by @Ashish Acharya:

Originally posted by @Chris Sullens:

Thanks @Ashish Acharya! Regarding the de minimis rule, is that saying that any invoiced expense under $2500 can be deducted rather than capitalized? So, I had new flooring installed in this new rent house, but it cost me $2000. This is prior to any tenant being placed. Does that expense fall into the de minimis rule? What if I have several items like that and all together it's 12k worth of expenses? But each item is less than $2,500?

New flooring of 2000 can be expensed. 

If the invoice has multiple items, you look at the items separately. you need to factor into taxes for those items too. Meaning, all the expenses are added to make one unit/Item ready ( shipping cost, taxes, installation and those kinds of stuff). There can be multiple items per invoice but can be looked at separately. 

Talk to you CPA, he should know this.  

 Ashish,  This is not correct.  What you are talking about are expenses that are incurred between tenants or during tenancy - essentially, after the property is placed in service.

For expenditures that are incurred before the property is placed in service, almost everything needs to be capitalized.  This includes labor and materials for repairs and improvements, interest on loans used for acquisition or repairs, property taxes, etc.  There are a few *possible* exceptions that have to do with services received currently vs services to be put into service later.  Some possibilities are:

1. HOA dues - if this is for current/ongoing maintenance of the property, then it's possible to expenses HOA dues right away.

2.  Utilities - if this is for current service to the property, then a case can be made for expensing utilities such as water and gas/electricity right away.

3.  Ongoing services - if you have to get the grass cut weekly during the remodel phase, then these ongoing services can also be expensed right away.  

4.  Services unrelated to the property.  If you are paying an accountant or lawyer for services unrelated to the actual property (such as bookkeeping or drawing up blank leases, etc), then that can be expensed right away.

5.  Other current items.  If you go to Starbucks to buy coffee for your work crews or grab sandwiches for them, then that can be immediately expensed.  

These items are usually small enough during the construction phase that it doesn't really make sense to separate them out, so if you choose to roll the first 3 into the basis, that is acceptable.  The second two examples should always be expensed and not added to basis.