RE accounting/ tax question regarding capex vs expenses for rental property rehab....

[LeeH]

I've done small business accounting for years, but there seems to be various opinions on what's expensable and what's a capital expense when it comes to rental real estate.

So, I bought a house to rent. How would you categorize:

Asbestos testing and abatement
Trash removal... stuff left by previous owners
Trailer rental and dump fees for old carpet
Trailer rental to pick up new bathroom cabinet
Utilities during rehab

Or, is everything I do now part of the renovation, thus capex?

[craigster59]

When I had my rental properties anything spent on maintenance and repair was deducted from rental income.

The way it was explained to me, you deduct expenses on rental property yearly on income, for your personal home it is deducted on the sale of the property against capital gains.

[Sooner or later]

Does it increase the value or extend the life.

[Eric Coffey]

Originally Posted by LeeH

I've done small business accounting for years, but there seems to be various opinions on what's expensable and what's a capital expense when it comes to rental real estate.

So, I bought a house to rent. How would you categorize:

Asbestos testing and abatement
Trash removal... stuff left by previous owners
Trailer rental and dump fees for old carpet
Trailer rental to pick up new bathroom cabinet
Utilities during rehab

Or, is everything I do now part of the renovation, thus capex?

Looks like OPEX to me. The only possible exception being the trailer rental to pick up the new bathroom cabinet. Though, some would argue that the trailer rental = OPEX and the cabinet itself = CAPEX.

In my experience (CRE), maintenance/repairs = OPEX, but actual "add value" improvements = CAPEX. That may be more of a "generality" with some exceptions, and I am not an accountant in any way/shape/form, so...

[BK911]

Easy way is to deduct costs from the rental income for either maintenance or repairs and put $0 in those inputs. Look at it like the renter paid for those items and the rest went to rent.

[jcommin]

Not a rental guy but

This is a definition I live by in my line of work. All of this is subject to interpretation and I yield to those in Finance.

“ A significant improvement in the performance of equipment, either from an operating cost, efficiency, safety or a quality control standpoint. At the time the asset was acquired, there was an expectation of the performance of the asset, in order to be capitalized, the expenditure must increase the performance beyond the initial expectations.”

In my world:

asbestos removal - capital
trash removal - expense
new bathroom - capital I would capitalize trailer rental too.
carpet is capital
painting is expense

I would seek the advise of an accountant.

[fintstone]

IMHO, nothing you are doing is a capital expense as all are repairs of damage by one tenant to prepare to lease to the next. An addition, new roof, etc....are capital. It is better to deduct now from current income/rent. If it is newly purchased by you to rent, then add repairs made to the basis (for depreciation) if made before putting into service (up for rent).

[mfiazzo]

Originally Posted by Eric Coffey

Looks like OPEX to me. The only possible exception being the trailer rental to pick up the new bathroom cabinet. Though, some would argue that the trailer rental = OPEX and the cabinet itself = CAPEX.

In my experience (CRE), maintenance/repairs = OPEX, but actual "add value" improvements = CAPEX. That may be more of a "generality" with some exceptions, and I am not an accountant in any way/shape/form, so...

Agree, in my rental property my accountant says opex is maintenance and repairs, CAPEX is improvements. He also always has me depreciate the CAPEX improvements. Such as new furniture. New refrigerator, new carpets etc....

[john70t]

IIRC...Some business losses can be forwarded for up to five years as deductions.
I'd assume that would include CapEx or anything permanent to the property.
https://www.thebalancesmb.com/tax-loss-carryback-and-carry-forward-explained-398178

(not sure. talk to your CPA of course)

That might buffer the cost of major improvements depending on your situation.

[wdfifteen]

Originally Posted by Eric Coffey

Looks like OPEX to me. The only possible exception being the trailer rental to pick up the new bathroom cabinet. Though, some would argue that the trailer rental = OPEX and the cabinet itself = CAPEX.

I agree except for the asbestos remediation, which is a one-time expenditure that adds value. The code may offer some special treatment because it is a government mandated expenditure.

[wdfifteen]

As a practical matter I would expense the whole thing, though technically I think the asbestos remediation and all costs associated with the bathroom are capital expenditures. There may be some special tax treatment for asbestos removing since it is a government mandated expense.

[MBAtarga]

To my understanding - carpet is a wear and tear item - just like paint. It's not a capital expenditure - it's considered an expense. A google search agrees:

Carpet, paint, window coverings, landscaping are all improvements that have a relatively short life time (even though they seem expensive in some instances) and are not considered a capital improvement. “Capital Improvements” are deemed improvements to the property value.

[smadsen]

None of that stuff is CAPEX and none of it would go on any audited balance sheet as an asset. Hauling carpet to the dump is an expense, not a depreciable asset. So is general trash removal. Renting a truck to haul a cabinet is not a depreciable asset. Sheesh. All that stuff is an expense item on an income statement.

[berettafan]

I would expense all of that in current year. repairs.

[berettafan]

FYI carpet itself is treated differently in rentals and can be depreciated over a shorter period of time.

[wdfifteen]

Originally Posted by berettafan

I would expense all of that in current year. repairs.

I have wondered about this. Say you buy a $200k rental property at a discount, say $150k, because it needs a lot of work, then put $50k into making the kind of repairs listed in the OP, do you expense the $50k?

[jhynesrockmtn]

I am a CPA, license not currently active (have to say that). While I don't work as a CPA any longer and I'm not an expert in all things rental property wise (I do own them) I'll weigh in. In a normal business asset situation, the general rule for capitalizing an an asset when purchased is whether it has a useful life of longer than one fiscal year. Thereafter, any expenditure incurred to maintain that asset is expensed unless you can show it adds/extends the useful life of the asset.

In rentals, if acquired as a rental property from the get go and you are not converting your personal residence to a rental, the acquisition costs (purchase price, closing costs, etc.) plus the costs of getting it ready to rent would be the original basis in the property. So if this is all being done prior to putting it "into service" it would be part of the basis.

If you were doing the work you described a year into renting the place out they would all be expensed as they would not add value to the property in the eyes of most appraisers.

I found this on the Intuit site and it is pretty helpful;

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a 2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

[berettafan]

Originally Posted by wdfifteen

I have wondered about this. Say you buy a $200k rental property at a discount, say $150k, because it needs a lot of work, then put $50k into making the kind of repairs listed in the OP, do you expense the $50k?

I was referring to OP's question which I inferred to be several hundred or maybe a grand or so in cost.

[Bob Kontak]

Originally Posted by berettafan

I was referring to OP's question which I inferred to be several hundred or maybe a grand or so in cost.

Yep.

[fintstone]

Originally Posted by jhynesrockmtn

I am a CPA, license not currently active (have to say that). While I don't work as a CPA any longer and I'm not an expert in all things rental property wise (I do own them) I'll weigh in. In a normal business asset situation, the general rule for capitalizing an an asset when purchased is whether it has a useful life of longer than one fiscal year. Thereafter, any expenditure incurred to maintain that asset is expensed unless you can show it adds/extends the useful life of the asset.

In rentals, if acquired as a rental property from the get go and you are not converting your personal residence to a rental, the acquisition costs (purchase price, closing costs, etc.) plus the costs of getting it ready to rent would be the original basis in the property. So if this is all being done prior to putting it "into service" it would be part of the basis.

If you were doing the work you described a year into renting the place out they would all be expensed as they would not add value to the property in the eyes of most appraisers.

I found this on the Intuit site and it is pretty helpful;

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a 2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

Pretty much how I have done it for almost 40 years without issue. I don't think I have ever done a capital improvement on a rental as the property is typically not added on to after put in service and everything else just maintains it in rental condition. Of course, I only initially rent out a property in pristine condition (usually after I just moved out). Replacing damaged/broken items or repairs are just part of that (including cabinets, countertops, bathroom vanities, carpet, appliances, etc.). It would seem to me to only do so when there is sufficient damage (or the item does not work) that it requires replacement/repair to continue renting. One does not have to go back and find outdated materials, faucets, etc. to use so you can expense the same year (preferable tax-wise)...so you do actually continue to improve the property as repairs tend to update the property. Since labor/installation is usually the major cost in any repair/replacement, one would be wise to do repairs with slightly higher-end materials over time (As they stand up better to renters, help increase rents and eventual sales price). As a matter of practicality and tax purposes, when you get estimates, get estimates for repair of windows, roof, etc...even though repair may well be replacement of the window, a portion of the roof, etc.