Depreciation vs Repairs/Maintenance Expenses- Tax Ramifications

[Jody Vreeland]

Hi all-

Our tax accountant informed us there there were changes made by the IRS last year regarding "rules/guidelines" on how you can categorize expenses when rehabbing a rental property (not flipping). We, like many residential real estate investors, seek to maximize our yearly losses for tax purposes and therefore would like to keep as much categorized as repairs/maintenance as possible vs capital improvements (added to fixed asset) and therefore depreciated. She informed us that the NEW rule states "anything done to the house prior to it being 'ready to rent' is added to fixed cost of house and depreciated while anything done after its 'rentable' under the amount of $2500 is expensed in that year." This "ready to rent" verbiage seems to have some gray zone, and we are wondering what people are doing out there who seek to deduct as much r/m expenses as possible. Let me know if you have any thoughts/advice on this topic. Thanks you kindly.

[Linda Weygant]

"Ready to Rent" isn't all that grey.  It simply means that the house is habitable, you are actively marketing it as available to rent and you would rent to the first qualified applicant to show up that day.

Many people think they can put up a craigs list ad for rent while the house is in the middle of a full gut remodel, and claim that it is ready to rent.  This won't fly.  But if the interior is ready to go, except for maybe a few punch list items, and the house qualifies as habitable (generally, working kitchen, bathroom, windows, walls and roof), then you may be able to claim that it is ready to rent if you've got an ad up and are actively soliciting for tenants.

Additionally, that $2500 threshold is not automatic.  There is an election you must make and include with your tax return, so make sure that is happening before you file.