Bummed out over Genral Plan of Improvement Rule

[Shane Moss]

I just closed on my first SFR today! I've been feeling good all day until I read more about the difference between repairs and improvements. More specifically, I'm bummed out over the General Plan of Imporvement rule. Here's why:

I purchased a forclosure. It has one huge problem: the foundation needs some major work; about 10K to be exact. I was confident this would be a repair, as the solution will be to restore it back to its original state. Figuring I'd be able to deduct it all in one year as a repair, I thought 10K wasn't too bad since a little over 3K should end back up in my pocket. But then I got to chapter 4 in my book, Every Landlord's Tax Deduction Guide (great book by the way), and read the crap about too many repairs in a short time can constitue a general plan of imporvment, therby classifying your repairs as improvements.

Besides the foundation, I need to make other "repairs" such as, re-glazing the bathtub, re-finishing the wood floors, and completely repainting the interior. These are all fairly large expenses and really need to be done before I rent it out. Of course I have other misc. things that would be classified as an improvement at anytime. That will probably be around 5K for those improvements.

Thank you for hearing my rant. Now if I may, I'd like to ask for advice. Do you guys have any ideas on how to keep these things designated as "repairs" w/o spreading the work out over several years. Is the general plan of improvement subjective enough that I can take some liberties and not worry about it?

I appreciate the help!

[Jon Holdman]

My first advice is to get a CPA who's knowledgeable about real estate and discuss your situation and plans with them. Real estate taxes are not a DYI project,any more than those foundation repairs.

If you're doing a fix and flip, all the work you do is either immediately deductible or adds to your basis. In either case, it reduces the gains on the sale and therefore reduces the taxes you owe.

If you're going to hold this for a rental, anything significant you do prior to having the property rent-ready becomes a depreciable item, and has to be depreciated over several years.

Not sure what you mean by "putting $3K back in your pocket". If you mean using passive losses to offset ordinary income, be sure you understand those rules. They are complex, and there are significant limitations.