Rental purchase 4 airbnb. Do I form my LLC before repairs 4 taxes

[Jonathan Duarte]

Hi everyone. My name is Jonathan I'm looking for some guidance and direction. I've purchased my first rental property in a mountain resort adjacent in the San Bernardino Mountains of Southern California. It is a small 1080 sq. ft. 3BR/1BA with detached garage proximate to local ski resorts. My goal is to make it a short term rental on Airbnb. I want to form an LLC entity to protect my other assets but also to manage the investment as a business. The property requires numerous upgrades and repairs. For tax/accounting purposes, is it necessary to form the entity before hiring contractors or making purchases for projects that can be DIY? With current and new tax laws I want to do my best to leverage the tax code and avoid more first-time investor mistakes. In addition, for those that have experience in airbnb properties with some success, could you share/impart some wisdom as to how you address accounting, tax planning, and entity formation. Thank you. I really look forward to any help as I am combing through other member questions and blog articles.

[Brandon Hall]

@Jonathan Duarte there are two requirements the IRS imposes in order for a property to be in service: ready and available.

Once in service, the property is operational and expenses can potentially be deducted as operating expenses assuming they meet certain criteria.

“Ready” for rent generally means that a certificate of occupancy can successfully be issued for your property per your locality’s rules. This means that your major components have been repaired, the structure is in good shape, and the property is habitable.

“Available” means that the property has been advertised for rent. It does not mean that someone has moved in, just advertised.

Most investors wait until the end of the rehab to advertise (make their property available) which all but guarantees that no repair cost will be written off because the property was not placed in service until the advertisement date, which occurred at the end. 

Our method is to have our clients advertise at the beginning, or in the middle, of the rehab. This does not place the property into service (since you still have to meet the “ready”) criteria, but it does provide us with flexibility to square off against the IRS on treatment of costs.

Setting up an LLC will not affect the places in service date and is a completely separate conversation. If you are going to set up an LLC, I would recommend doing it before you purchase property at all. This will help you avoid problems such as Due on Sale clauses and transfer taxes.