Operating expense or capital improvement?

[Timothy VanWingerden]

I am working with an accountant as I prepare returns for the first year of owning real estate. I read Brandon Hall’s article from a while back talking about the tax myth’s for real estate investing. One was the following:

“You cannot deduct any costs incurred on your rental property until you place the property into service. Without placing the property into service, we are forced to capitalize costs and depreciate, generally over 27.5 years. Placing the property into service means advertising the property for rent.

The one exception to this rule is if you already own rentals in the same geographic location as the new rental you are rehabbing. You are then considered to already be operating in that general location, and thus you have flexibility in deducting your rehab costs rather than capitalizing without having to advertise the new property first.”

In 2018, I purchased 2 quadplexes side by side. I spent 28k rehabbing a unit in a quadplex, and another 25k fixing the properties up (repair HVAC, roof, some new windows doors etc). From my understanding, I would be able to write these off as operating expenses since I was receiving rent the entire time. On the rehab unit, I did not get rent from that particular unit, but from the quadplex as a property.

When I suggested this to my accountant she said that it wouldn’t fly past the IRS and is planning to capitalize the expenses over 10yrs.

I know that each instance is unique and one piece of advice can not be applied to the whole, but given the situation I described, what do you all think?

Should I be able to write these off as operating expenses or am I just begging for an audit?