I have read many articles related to needing a W9 from your contractor and ultimately issuing a 1099 eventually to account to payments made to the contractor during flips. I have not seen anything about if this is still necessary for rehabbed properties that are not sold, is it the same? This is related to a BRRR which we bought, completed and refinanced within this year and plan to hold for a long time.
Additionally, let's say we sell the house in 10 years, do I need to keep all of the receipts and invoices from the rehab until we sell to track the capital improvements so that we use the improved value of the property (purchase + rehab) instead of just the purchase price?
Disclaimer***I'm not a tax professional, so go talk with one, but yes you need to issue 1099s for all of the work you paid to have done. Also keep track of your materials budget if you paid for that personally. Your tax records will show what your basis in the property is, hence the importance of issuing the 1099s since that will be reflected on your taxes.
Also, if the rehab costs were fairly significant, $30k+, I'd definitely look into having a cost segregation done, it can be amazing!
Disclaimer***I'm not a tax professional, so go talk with one, but yes you need to issue 1099s for all of the work you paid to have done. Also keep track of your materials budget if you paid for that personally. Your tax records will show what your basis in the property is, hence the importance of issuing the 1099s since that will be reflected on your taxes.
Also, if the rehab costs were fairly significant, $30k+, I'd definitely look into having a cost segregation done, it can be amazing!
I have not seen anything about if this is still necessary for rehabbed properties that are not sold, is it the same?
If you and your tax professional determine that your rental activities rise to the level of a "trade or business", and that a payment obligation has been triggered based upon amount of payment and the payee's W-9, then yes, a 1099 should be issued.
Additionally, let's say we sell the house in 10 years, do I need to keep all of the receipts and invoices from the rehab until we sell to track the capital improvements so that we use the improved value of the property (purchase + rehab) instead of just the purchase price?
You'd generally reporting everything on your tax return. However, you do have a substantiation requirement for the what's reported on your returns. I usually advise holding onto records for a minimum of 7 years. Your tax professional can add details based on your individual fact and circumstance. Digital records are acceptable.
Also, if the rehab costs were fairly significant, $30k+, I'd definitely look into having a cost segregation done, it can be amazing!
Seems rather moot to me... His invoices will break out exactly what was done during the rehab and where the cash went. If not, he can request this level of detail. Cost segregation & allocation is useful if one purchases a bucket of assets. That's not what's going on here.
I would disagree on the cost seg portion @Eamonn McElroy. I did several major rehabs and did cost segregation studies on all of them and was able to take significant deductions in that same year. Additionally, I've spoken to investors about doing a cost seg on an expensive building/asset they purchased without having done ANY rehab because the seg breaks down the different effective lives of different components...not everything needs to be depreciated on a 27.5 or 39 yr. schedule.
So I would encourage anyone to look into it, regardless of whether or not they purchase a "bucket of assets", I think there is significant benefit to even someone purchasing and rehabbing a SFR.
I am not debating the efficacy of cost segregation. I routinely advise my clients on cost segs. I am aware of the tax benefit.
What I talking about is what you are proposing. i.e. A cost seg on a rehab for a property you concurrently own. You paid a cost seg company to tell you something that your GC and CPA could have told you in much less time, and for less cost. i.e. What asset classes were affected by the improvements. That is redundant. You paid for something you didn't need.
However, we live in America. If you want to keep doing what you're doing, it's your prerogative. I'm sure the cost seg company isn't going to discourage you.