How do I record mixed use commercial building major improvements that took several years to complete.

[SRA]

I purchased a commercial building in 2013 that is mixed use.  The upstairs was old apartments that we tore down to the studs and have over the course of the three years completely redone some of the units.  In round numbers, building was $230k, included in loan was $140k for improvements of various kinds including electrical improvements, new carpeting in offices, etc. and things we did to the other areas of the building.  The loan was not enough to complete all the work so we have slowly raised the funds to finish the main 2nd story improvements ourselves and are finally near completion.  The funds spent in prior years essentially did not improve value of the building much since they were not complete and we could not realize any revenue from the improvements, but the loan has been in place for a few years now.  Do the improvements get recorded in chunks, or as one complete project for depreciation purposes since obviously they can not be expensed.  If it matters much, the rest of the building in lower level is warehouse, dock space, offices, etc. that we rent to ourselves since we established a separate LLC to hold the property.

[TaxGuyBill · Accepted solution]

You start to depreciate the improvement when they are "placed in service".  "Placed in service" means when they are ready and available for business use.

For example, if all of the apartments were finished approximately the same time, you would depreciate it all when completed.  But if you finished one apartment at a time, you would do the depreciation in 'chunks' when each unit was "placed in service".

Does that make sense?

As a side note, you will need to determine how long the building and improvements are depreciated.  Although "Residential Rental Property" is depreciated over 27.5 years, as a mixed-use building, everything is probably depreciated over 39 years.

The determining factor is that if 80% of the total building rents are for Residential Dwelling Units, then the entire building and improvements are deprecated over 27.5 years.  If it does not meet the 80% test, the entire building and improvements are depreciated over 39 years.

[SRA]

Thank you taxguybill!  While it means I don't have to go back and resubmit my prior year's taxes, it does mean my deduction isn't all that great this year.  :(  But your information was extremely helpful.  I appreciate you taking the time.