Tax liabilities on the first “R”

[Phil Hucke]

Question on my new business for tax time: earlier this year I both formed an llc (sole) and through the business purchased a distressed property for cash.  I obtained a loan for the rehab costs.  This is a full gut rehab with updates to all systems.  As this is will be my first time filing taxes with an llc, I’m wondering how this project is treated.  By the end of the year, the business will have zero income (property not rented yet) and lots of expenses (labor, materials,etc)

Taxes on a finished rental are pretty straightforward, but what about the initial rehab / startup costs? I see different things about wether   building materials are an expense, or just the sales tax on the materials with depreciation of durable components. ?  If anyone has an insight into how this is handled, I could use some pointers (mostly so I know what to do with the shoebox of receipts) Thanks!

[Natalie Kolodij]

WAIT

I just re-read the post topic- this is a rental that you're doing a BRRRR

Renovate

All of these costs will be capitalized into the basis/cost of the property. Once it's in service/ available for rent then that amount goes into service and gets depreciated from that point service. 

Some of the elements of the renovation may be able to be separate out and expensed on a shorter time line but nothing gets deducted until the rental is in service (2020). 

I would recommend even more so working with a tax pro on this.