BARRRRR strategy clarification

[Jeffrey Eugen]

Hello. In coming months I am taking possession of a triplex with the intent to use the BRRRR strategy. 2 of the 3 units will undergo kitchen and bathroom renovations. Approx $20,000 will be spent.

Now I am hearing about this BARRRR strategy — which if I understand clearly — basically means that as long as I start to advertise and have potential tenants come to look at the units once we are to begin the reno, I will be able to write off all the reno work? 

This is truly amazing — I’m just hoping someone here has done this and can vouch. Even better, if there is an accountant on BP that can clarify this to being a legit strategy that won’t haunt me if the IRS come a knockin. 

Any assistance or knowledge here is appreciated. Thanks. 

Jeffrey 

[Nicholas Aiola]

@Jeffrey Eugen This is a HUGE mistake made by a lot of investors (simply because they don't know about it), so it's good that you brought it up.

Get ready for a trail of definitions... 

Deducting rehab/repair costs as operating expenses vs. capitalizing and depreciating them depends on when the property is placed "in service". 

In service means "ready and available" for rent.

In simplest terms, ready means livable; available means advertised for rent.

The key is, it has to be both ready AND available to be placed in service and, therefore, to deduct most of your rehab costs as operating expenses instead of capitalizing and depreciating them over time.

You can advertise a house you gutted down to the studs all you want, but there's no chance the IRS will support that being "livable".

But yes, it is very important to advertise ASAP, as soon as the property is in living condition.