To determine if the expense should be classified as a capital improvement or a deductible repair, the context of the expense is very important.An example is, if an item of expenditure is part of a general plan of modernization, renovation or rehabilitation to equipment or other business property, it typically must be capitalized even though on its own it would be currently deductible.According to IRS Code, expenses that you must capitalize are those that:Materially increase valueSubstantially prolong useful life (including replacement of deteriorating assets)Adapt the property to a new or different useHowever, you are allowed to deduct expenses and fees for routine maintenance and repairs that help keep the property in efficient operating condition.

Lastly, don’t forget about the tax benefits, you can often deduct mortgage interest, repairs, and other expenses.If you need help navigating any part of the process, from financing future investments to managing your rental, feel free to reach out. 

Tax ConsiderationsSTR income is taxed higher than LTR, but deductible expenses (e.g., repairs, furnishings) can offset this.

Also, since you never gave the keys for possession, highly unlikely a judge will even allow you to deduct per diem rent from the SD.After losing a couple of court cases on scenarios similar to yours, we huddled with our attorneys, who recommended charging a Holding Fee.We have a Holding Fee Agreement we require prospects to sign to hold a property until they later sign a lease.

If you collected an insurance claim you would only be able to collect your out of pocket (ie deductible).

Or do I still complete the 1031 exchange for the full $2.5MM, with the $500K deduction only reducing the deferred tax owed?

And they’ll have to declare that interest on their taxes (Though the kids can then deduct it from their taxes.)

Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy.

Still, if you want to be able to deduct your expenses before paying taxes in Mexico, you can always do so by investing through a Mexican corporation instead of a fideicomiso.Seen from my side and as I mentioned earlier, the issue would be that the ROI in Cancun specifically is too low, although 9% would be considered great by many people.

Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy.