AboutGerard L. Samoleski, CPA* Expertise Individual Income Tax, Business Income Tax, Partnership Income Tax, Estate Tax, Gift Tax, Tax Planning, Business Valuation, Divorce Tax. I can't answer legal questions as I am not an attorney.
Experience 10 years of Federal and State tax preparation for high-net worth individuals, including a major international accounting firm.
Organizations AICPA, FICPA, NACVA
Education/Credentials Bachelor of Business Administration (Accounting Major)- University of Miami (FL);Master of Science of Taxation, University of Miami (FL)
Awards and Honors Certified Public Accountant*, Certified Valuation Analyst, Accredited in Business Valuations. *Regulated by State of Florida
My wife and I purchased a piece of property in California in December 2006 with the intent of it being our first rental property. It was originally a 300 square-foot house in need of repair. We decided to rebuild the existing house and add on a 600 square-foot addition and construct it ourselves (100% our own labor). Since we both have full-time jobs, we can only work on it during the weekend. The property is 120 miles away (240 miles round trip) and we have spent EVERY weekend improving the home since December 2006. We plan to be completed in June 2008, at which point it will be available for rent.
I know the cost of all the materials we put into the house is an improvement and not a repair. I have read several books including NOLO Press 'Every Landlord's Tax Deduction Guide' and it's not clear where I fall since our improvement will take over one year (through the entire 2007 tax year) to complete and all the examples I read seem to have situations that take place during the same tax year. I know I can't start to depreciate it until June 2008. Can I claim travel expenses, mileage (about 15,000 miles), meals (per diem), flat-bed trailer ($2000), etc, for what we did in 2007 on the 2007 tax return? Or does everything we spend from Dec 2006 to June 2008 go in as the improvement, as such, we have to wait until the 2008 tax return before taking any deductions? So my question is, what can I deduct on my 2007 tax return for what we have done in 2007?
Thank you for your help!
Answer Larry:
I'm sorry to say that you will have to capitalize all of teh expenses of the project until you place it in service. That means that all of the costs you incur to increase the property's useful life will be summed up. When you get the final CO on the property and list it as a rental, you will be able to depreciate that cost over 27.5 years.
It gets worse...even the interest and taxes get capitalized as a rental property. Although, if you only own one other home, you can at least deduct the interest and taxes for this one on your Schedule A (as opposed to Schedule E) until you are able to list it as a rental.
Your travel expenses and costs to get to the home is a very grey area. On one hand, ordinary expenses in the course of business would be deductible (well, capitalized into the cost and deducted over a number of years as explained previously) and on the surface, these expenses would qualify (auto, meals, etc.). However, since you aren't actually renting the home for sale and are visiting it every weekend (I presume that you sleep there), the IRS might consider this project a vacation home and would disallow all of the capitalized deductions.
I would like to add that for every dollar of capitalized cost that you will report to the IRS is going to be an increased dollar value to your property tax appraiser. I don't know how property taxes are assessed in CA, however in FL, they are based on the value of the home. When you make an improvement, they can adjust that value and vis-a-vis adjust your tax bill.
I'm sorry I don't have a better answer for you, but I hope my response was helpful for the coming tax filing.
