Real Estate Tax Strategies for Investors

Important Strategies That Investor Can Use Include
Logging in the date the property was placed in service.  When you first purchase a rental property, it will be considered “placed in service” on day one if there is a tenant in the property.  If there is no tenant, then the property is not in service

To place a property into service, you must meet two requirements:

• The property must be ready for use. 
  
• The property must be available for use.

Generally, your rental is ready for use when the local government has issued a Certificate of Occupancy (CO), and the unit is advertised for rent.

Renovation and Repair Notes
Rental property investors will often purchase a property vacant and in need of renovations before it’s ready to rent.  Any renovation costs incurred before you place the property in service must be capitalized and depreciated (generally over 27.5 years), regardless of whether or not they are actual capital improvements or simply repair and maintenance expenses.

• That is, costs that are capitalized and then depreciated are recovered over several years and then are subject to depreciation recapture (a 25% tax when you sell the property). Regular repair and maintenance expenses are fully deductible in the year incurred and are not subject to depreciation recapture. 
  
• The way to effectively manage this distinction from a tax perspective is to complete the minimum amount of work necessary to get the property ready for lease, then immediately advertise it for rent.  Once the property is in service you can finish the renovation and deduct some of the costs as repair and maintenance expenses in the current year.  Other startup costs such as appliances, which are normally considered capital improvements, become deductible in the current year under the de minimis safe harbor provision of the tax code.

Examples of renovation items you want to complete before you place the property in service are:

• Fixing structural issues (e.g., cracks in the foundation).   
  
• Replacing an entire roof, floor, bathroom, kitchen, or plumbing system.
• Adding a deck or new HVAC system.

Examples of renovation items you want to do after you place the property in service include:

• Painting.
  
• Installing appliances.
• Replacing a doorknob or window. 
  
• Repairing an existing plumbing system. 
  
• Other minor repairs

As a best practice, you will want to get in the habit of itemizing your invoices so that you, or your accountant, can more easily categorize these items as repair and maintenance expenses or capital improvements.  Itemized invoices are also helpful in determining whether expenses might qualify under one of the safe harbors mentioned in the next section or for 100% bonus depreciation.