I am very unclear about what I can include in adjusted basis based on a rental property I purchased that took a while to place into service. I purchased the property in 11/2017 and it has an upper unit that we occupy and a lower unit that existed, but was not "legal" or up to code when purchased. It took us 1.5 years to get all the necessary approvals and construction completed, and we placed the unit on the rental market in July 2019. Considering the substantial costs involved in creating the legalized unit, I want to be sure to recapture as much as possible through depreciation. Can I include in adjusted basis (50% reflects the owner-occupied portion): 50% of property taxes paid on the property while it was under construction in 2018? I was over the $10,000 cap on just payroll taxes, so I think I can say that none of the property taxes have been deducted anywhere yet. Assuming the answer to 1 is "yes," can I claim 50% of property taxes this year as a deduction, or does it depend on the month actually paid? We made one payment for the 2018 tax year in February 2019, and one payment for 2019 in December. 50% of closing costs that were not deductible on 1040 Schedule A in the year of purchase (insurance, title insurance, courier costs, etc.)? It seems to me that under the IRS publication regarding depreciation (535), property taxes are carrying charges that can be depreciated. Separately, If I purchased appliances prior to placing the unit into service, can I depreciate those on an accelerated schedule based on the shortened appliance schedule or do they need to be lumped in with the rest of the 27.5 year depreciation?If I replaced some windows and siding in the upper unit after the unit was placed into service due to them leaking and allowing water to enter the lower unit, that counts as an exterior repair that goes 50/50 to each unit even though the repair is physically to the upper portion of the unit, correct? Thank you in advance!

Question

Adjusted Basis for Pre-Service Costs

Forum|Forum|6 years ago
February 2, 2020
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I am very unclear about what I can include in adjusted basis based on a rental property I purchased that took a while to place into service. I purchased the property in 11/2017 and it has an upper unit that we occupy and a lower unit that existed, but was not "legal" or up to code when purchased. It took us 1.5 years to get all the necessary approvals and construction completed, and we placed the unit on the rental market in July 2019. Considering the substantial costs involved in creating the legalized unit, I want to be sure to recapture as much as possible through depreciation.

Can I include in adjusted basis (50% reflects the owner-occupied portion):

50% of property taxes paid on the property while it was under construction in 2018? I was over the $10,000 cap on just payroll taxes, so I think I can say that none of the property taxes have been deducted anywhere yet.
Assuming the answer to 1 is "yes," can I claim 50% of property taxes this year as a deduction, or does it depend on the month actually paid? We made one payment for the 2018 tax year in February 2019, and one payment for 2019 in December.
50% of closing costs that were not deductible on 1040 Schedule A in the year of purchase (insurance, title insurance, courier costs, etc.)?

It seems to me that under the IRS publication regarding depreciation (535), property taxes are carrying charges that can be depreciated.

Separately,

If I purchased appliances prior to placing the unit into service, can I depreciate those on an accelerated schedule based on the shortened appliance schedule or do they need to be lumped in with the rest of the 27.5 year depreciation?
If I replaced some windows and siding in the upper unit after the unit was placed into service due to them leaking and allowing water to enter the lower unit, that counts as an exterior repair that goes 50/50 to each unit even though the repair is physically to the upper portion of the unit, correct?

Thank you in advance!

Not A Product Question

M

MAK70

No, unfortunately you cannot deduct the 50% of the property taxes for the time of renovations, but of course going forward you can. Also you cannot deduct the closing costs but they will increase your basis which will become important when you sell the property. Appliance purchased before you began renting should be depreciated with the property- especially with the increased audits you really have to be careful. Once again, the siding will need to be split 50/50. Great questions- you can tell you have done your homework and I wish you much luck in your rental activity!