Rehab Or Repair?
Hi,
From the IRS perspective, could someone help me understand the difference between a rehab & a repair? We bought a house that needed extensive repair before renting. I was told that I should depreciate the $$ for the work instead of a taking it as a deduction?
Any help would be appreciated.
Thanks
Eric
A repair fixes something that is broken. A capital improvement (renovation, rehab) increases the value of the property or extends its useful life.
Fixing the roof leak is a repair. Replacing the roof is a capital improvement.
Many times our property just needs a bunch of repair projects accomplished along with a few replacements. When a rehab project is comprised of a large number of repair jobs, the IRS will tell you to aggregate them into a single renovation project and depreciate the cost of the project as a capital expense.
My rule of thumb is if the condition of the property makes the as-is appraisal a significant discount to the after-repaired value, then the the cost of the work to improve the appraised value of the property to its after repaired value (or higher),. is a depreciable capital improvement.
Thanks. I have a buddy who is buying low-end realestate and rehabbing. He paid $15K cash for the last one and put in about $50K to make it rentable. Is the $15K fully deductible?
Eric
No, the 15K is his purchase price -- the initial basis of this capital asset -- and is recovered through depreciation. It is not a deduction.
Quote:
On 2006-10-17 17:13, fdi wrote:
Thanks. I have a buddy who is buying low-end realestate and rehabbing. He paid $15K cash for the last one and put in about $50K to make it rentable. Is the $15K fully deductible?
Eric
Chances are that 15k is the value of the lot, or perhaps even less than the value of the lot if the house was in such poor repair. The value of the lot cannot be depreciated.
Does anyone know how depreciation is figured if property is purchased for less than the value of the land- in other words if the structure is seen as a liability rather than an asset- but then you repair the structure? Would the basis in the land be its actual value, or the discounted price you paid due to the liability on it?
Chris
The purchase price is alllocated between land and structure. The IRS requires that the allocation be reasonable and defendable.
One easy way to meet the IRS requirements is to look at the tax assessed value of the property. The tax assessor will allocate his assessed value between land and improvements. The ratio of the assessed value of the land to the total assessed value of the property is then multiplied by the purchase price to determine the cost basis for the land.
The balance of the purchase price is the initial cost basis for the structure.
The ratio method makes sense. Thanks, Newkid!
Chris
As a follow-up, 1031 exchange companies are compensated in two forms. First, they collect a set-up fee that can range from $450.00 to well over $1,500.00. Second, they retain all or a portion of the interest income earned on your 1031 exchange proceeds. The exchange companies that have the lower set-up fees tend to retain most of the interest income and only pay the client about 1% to 1 and 1/2 % and those that are more institutional in structure tend to charge $750.00 and retain only about 1% of the interest and pay the client 3.5% to 4.0%, which is usually the better deal unless you are doing a simultaneous closing (or close to it).
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You are so right. It gets lost in the fine print.
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I am bumping this up because this is the first time I have heard that 1031 intermediaries profit from the interest income on your funds. This could be a huge consideration when comparing prices of various companies. As usual wexeter is a gold mine of advice on this subject- wonderful to have him on the forum!
Chris
Zoegirl,
I know the company that you are referring to at $399.00. There are also a couple at $400.00. They all claim they are the low price leader, BUT they only pay the investor .5% (1/2 percent). This means they are keeping about 4.5% The investor usually never pays attention and never knows. If they do, they do not see it until the end of the exchange when they question the amount.
It is really deceptive marketing.
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Bill Exeter[ Edited by wexeter on Date 12/19/2006 ]
Owen, if you take my advice, you have to first file Form 8832 and check the box to elect your LLC to be taxed as a corp. Then you have to send in Form 2553 to be an S.
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Just to clarify, you CAN get a FEIN even for a disregarded entity. Getting the FEIN does not change your situation.
Well that is a possibilty I cannot attempt because one has to be a US permanent resident at least to establish an S-corp. I am not one.
Quote:
On 2006-12-05 12:35, LeaseOptionKing wrote:
Owen, if you take my advice, you have to first file Form 8832 and check the box to elect your LLC to be taxed as a corp. Then you have to send in Form 2553 to be an S.
If you are buying with a Purchase Option, you are still selling quickly, because it will be with a simultaneous closing (unless you have the Deed).
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So what do you recommend? Please wake mne through it step by step
Quote:
On 2006-12-06 15:59, LeaseOptionKing wrote:
If you are buying with a Purchase Option, you are still selling quickly, because it will be with a simultaneous closing (unless you have the Deed).
Thanks for your advice.
I am embarrassingly ignorant when it comes to taxes.
I guess if I want to become a well rounded investor, I should take the time to learn how taxes relate to my properties.
Thanks
I did everything by the book with the 1031.
Identfied properly, and even waited the 180 days before I took out my "boot".
So I should be fine in that regard.
I also have felt that I should talk to my current preparer and ask if she can handle my taxes this year.
Thanks.
Quote:I did everything by the book with the 1031.
Identfied properly, and even waited the 180 days before I took out my "boot".
So I should be fine in that regard.sirbeigealot,
Is there some reason you waited 180 days to take out your taxable boot? Did you fail to complete an exchange? Tell us more.
Yes, I was buying a condo down in MS, and during escrow the property was deemed "unwarrantable", and would require a down payment of 15%.
So I decided not to buy it, even though it was identified.
I was told by the exchange co. that I could take the boot out early, if I had an atty. sign a notice of non responsibility on the part of the exchange co.
When I met with the atty., he raed the fine print and advised me not to take the money early, but instead to wait until the 180 days expired.
I decided to play it safe, rather than risk losing the 1031 tax benefit.
You were correct in waiting the 180 day period. It could have jeopardized the rest of your 1031 exchange had you not waited. Good job!
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Bill Exeter...
Thank you for your comment.