Capitalize or expense

[Mark Forest]

I have brought this up on other boards, but I still am not sure of the answer. I am a landlord who has acquired some fix up properties which I will lease to tenants. I have not yet made any of the houses rent ready. The fix up procedure has gone on for three months. Do I capitalize these fix up costs or can I expense them? I think the new roof and furnace are capital improvements, but what about paint, drywall, electric outlets, PEX pipe repairs, and step repairs? I have heard from some sources that ANY expenses to get the house to rental condition must be capitalized.

Secondly in my state of Michigan property taxes are prepaid, and at closing the purchaser (me) reimburses the seller for the portion of the property taxes applicable from the closing date forward. Do I capitalize these or are they expensed?

Thank you for your answers. I want to start allocating these expenses properly now.

[Steven Hamilton II]

Steve Might, Jeff S., Mark Purtell, & Dale Osborn

Think of anything done before the property is placed in service as your start-up costs. EVERYTHING prior to the property being placed in service (Ready for rent, meaning entirely completed and listed for rent) must be capitalized. It does not matter if it is property taxes or fixing a light switch. If it was done before the property is completed it must be capitalized and depreciated.

@Steve Might,
Because the property taxes were prepaid by him and you are reimbursing his cost, they are not accrued yet, you will expense that cost they will accrue during your ownership period.

@Mark Purtell,

I understand that you want to expense these items; however, you cannot expense something for a business that has not yet started.

@Jeff S,

Read above statement. If they are paid AFTER the placed in service date then yes they are expensed. You can pay them directly on the same day you put the "For Rent" sign out front and they can then be deducted.

Every auditor will take any expense from before the placed in service date and will try to REMOVE them from your tax return. You then must be sure to add them back in order to DEPRECIATE them.

Here is the HUD-1 Guide for where items go.
http://i1087.photobucket.com/albums/j466/StevenHamilton99/Homebasis.jpg

-Steven the Tax Guy

Your guide to IRS laws, rules and regulatiosn.