Treatment of Remodel Costs After Leased on New Acquisition

[Joe Taylor]

Good morning all... I purchased a residential property for a long term corporate client in November 2017.  The client asked for some remodel work to be done and expects to move in on March 1 2018.  It's pretty significant, let's say $20,000.  Typically the "in-service" date is when it's advertised for rent - in this case, it's leased but they aren't moved in yet. How would you treat the remodel costs (and depreciation/in-service date for the property) for you 2017 tax return?  

Thanks

[Ashish Acharya]

Originally posted by @Joe Taylor:

Good morning all... I purchased a residential property for a long term corporate client in November 2017.  The client asked for some remodel work to be done and expects to move in on March 1 2018.  It's pretty significant, let's say $20,000.  Typically the "in-service" date is when it's advertised for rent - in this case, it's leased but they aren't moved in yet. How would you treat the remodel costs (and depreciation/in-service date for the property) for you 2017 tax return?  

Thanks

Joe, 

The following elements must be proved with respect to an unit before it is considered placed in service:

1) Readiness

2) Availability 

3) Capability to perform its intended function

Depreciation starts when you placed the property in service. It can be before the lease was signed when the property was advertised and was available. If you never advertised and you found the tenent and signed lease after you bought, you can use the lease date to determine the placed in service date.

If the leased is already signed and asset is considered placed in service  the repair works can be deducted.

 Improvement has to be capitalized. Not all improvements have to be capitalized though, there is a safe harbor rule where you can expense everything below 2500 per unit of property.