Put your property in service first. If you buy a real estate property and start immediately remodeling, you are a real estate developer. That means there are no deductions until it’s put the property in service. Meanwhile, the expenses have to be capitalized and depreciated or amortized later. You won’t be able to depreciate the depreciable property and you can’t take the 100% bonus depreciation.
The strategy here is to put it in service. It could mean that you start off renting the property for a low amount and not for the eventual intended purpose. For example, let’s say you take a property is a low end single family home and you want to remodel it to a luxurious standard. First rent it at the low end, and then gradually improve it. One of my clients bought a blank lot and wanted to find a way to take some write-offs on it. After our consultation, he put up perimeter fencing and rented the lot to a nearby contractor who needed a place to park some of his construction equipment.
Both of these strategies put the property in service. Don’t just inventory your property. Put it in service!
Question: whilst I will definitely speak with my tax accountant, is there a minimum amount of time post-closing on a property that one must put the property (i.e. single family home or apartment) in service prior to beginning a remodeling project?
I am about to close on a property and this is EXACTLY my situation, whereas I was planning to remodel immediately upon possession prior to finding the first tenant.
Thank you!
There is no bright line test. However, you need to prove reasonableness. Best of all, can you remodel it in pieces with a tenant of some kind in place? (even if your tenant is someone who is using it as a storage place)
Can you elaborate on ‘prove reasonableness?’ Does that quantify to a specific amount of time?
I my case remodeling a 2 bed/1bath unit with total new kitchen, at least half the bath, all new paint and flooring, would be difficult to do with tenant in place. This work for 4-6 weeks likely best when there is a vacancy so as to have empty during tear out and re-build.
There is no brightline objective test. It just needs to be reasonable. If you rented it for one day, not reasonable. If you rented it for a year and then discovered you needed to make some repairs, that would be more reasonable.
But again, those are just examples of numbers. There is no brightline test.