NEW RENTAL QUESTION

[Lee B]

I have a client who has a total of 9 rental properties, 2 which were purchased during 2020.

One, an older house was purchased in early July. The prepurchase Inspection Report had a laundry list of repair & maintenance

items that were needed, none of which constituted a leasehold improvement, which cost $11,700 and several months to complete.

The house was advertised for rent in September, but was not rented for several months.

Total 2020 rent for this house was only $1,558 and other deductible expenses totaled $ 5,682.

Would you go ahead and deduct the $ 11,700 as R & M.

Note: the other properties generate enough taxable income to easily cover this potential loss,

therefore passive loss limitations are not in play.

[jasdlm]

I personally would add the $11,700 to the basis and depreciate.  It was part of the cost of putting the property into use for the first time.

Interested to see what others would do.

[Pacun]

I agree with jasdlm. Those expenses cannot be deducted in the year occurred because the house was not rented. You have to add it to the basis.

 

[DANRVAN]

2 hours ago, jasdlm said:

I personally would add the $11,700 to the basis and depreciate.  It was part of the cost of putting the property into use for the first time.

Interested to see what others would do.

That sounds right in this situation.

[TaxCPANY]

Per IRC Sec. 195 upto 5K of "business startup costs" can be deducted; amounts exceeding that must be amortized over 15 years as Sec. 197 intangibles (ignoring the 50K cap on startup costs), beginning the month in which the business begins.  But for no business having yet begun startup costs otherwise would have been deductible as ordinary and necessary expenses.
Also, per Rev. Rul. 81-150, expenditures that otherwise would have been capitalized such as those in constructing a capital asset, are not startup costs.
Based on the client's assertion that the 11.7K were 'mere' repairs and maintenance I wouldn't saddle the business with a depreciable-lived definition but take the 5K deduction and amortize 6.7K over 15 years.

[DANRVAN]

17 minutes ago, TaxCPANY said:

Per IRC Sec. 195

I don't believe 195 would apply unless the rental activity rose to the level of a trade or business.  That was not indicated here, OP mentioned passive loss offset by profit of other rentals.

[BulldogTom]

I am on the other side.   A repair is a repair and deductible in the year it happens.   So long as they do not extend the useful life of the property, deduct in full.  I am not afraid of an audit if I have the code and documentation on my side.

Tom
Modesto, CA

[Margaret CPA in OH]

In my opinion, since this was a new purchase and had to have significant 'things' done to prepare to place into service, the expenses should be capitalized.  I look to the Tangible Property Regulations Reg. section 1.263(a)-3.  The AICPA put out a Quick Summary of Final Tangible Property Regulations a few years ago and RSM Consulting has some nice decision trees to help. https://rsmus.com/what-we-do/services/tax/new-flowcharts-provide-clarity-on-the-final-tangible-property-re.html

When I look at both of these given the OP's description, I come down on capitalization.  YMMV.  I did not look at the definition of Leasehold Improvements because the description did not say the property was leased, rather a purchase.

[Lee B]

Thanks everyone for all of the useful input. I did say in my original post that none of the the work appeared to be a Leasehold Improvement.

However, when the property was purchased the house was definitely not in condition to be rented.

There were a number of electrical and plumbing code violations that had to be fixed, plus other cosmetic fixes to things that just looked ugly.

In addition all of this R & M had to be done before the property could be placed in service, therefore I have decided to capitalize the $ 11,700.

[DANRVAN]

1 hour ago, BulldogTom said:

if I have the code and documentation on my side.

How do you plan to circumvent 162(a) in regards to disallowing deductions incurred before the activity became functional?