Investment property

[Jmnix]

I have a question about a property I purchased in 2018.

My goal was to renovate it and either flip or hold as a rental.

So far I've been paying out of pocket to do renovations and covering the holding costs.

It has sat vacant all of this time while I have been doing renovations. I've done some myself and also hired out contractors.

I was wondering how I can take advantage of the money I have put into this deal.

I will have put around 60k out of pocket. I expect the property will have 40-60k in equity once completed.

It may be next year 2022 before I complete the project. If I keep and rent will I be able to depreciate the amount I've put Into the property? 

[GeorgeDenseff]

You cannot claim any of that money now.  When you sell the property, you will use the amount that you invested into the repairs as part of your basis for the home.

[Jmnix]

Thanks for responding..

If I desire to rent it out when it's finished will I be able to take a depreciation on the amount that I put into the house? And must that occur after it's completed and not this year while it's vacant?

Essentially, if I end up putting in 60k can I take a depreciation every year thereafter?

[Carl]

Depreciation starts on the date you place the property "in service" as a rental.

Those things that qualify as property improvements add to the cost basis of the property and get depreciated over time. For residential rental property that time is 27.5 years.

While I'm sure a vast majority of your costs (possibly all of it) will qualify as a property improvement, those things that do not qualify would be classified as a repair or maintenance costs. Those types of costs incurred before placing the property in service would not be deductible at all.

[tagteam]

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@Jmnix wrote:

If I desire to rent it out when it's finished will I be able to take a depreciation on the amount that I put into the house? And must that occur after it's completed and not this year while it's vacant?

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When you convert (change) your property to rental use then your basis, for depreciation purposes, will be the lesser of the fair market value on the date of the change or your adjusted basis on the date of the change (which is your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it).

See https://www.irs.gov/publications/p527#en_US_2020_publink1000219151

[By George]

Depending on the repair types, the itemized repairs can de depreciated as 5 year or 7 year schedule. The original cost of property less the value of the land is depreciated over 27.5 years.

Keep in mind that rental property is considered as passive income, therefore if your AGI is over $75k, passive losses can only offset by passive income. Therefore it may be best to consider all your repairs as capital improvements to building and include in the basis of house, thus depreciating over 27.5 years. Of course any losses not allowed can be carried forward and claimed when property is sold.

[tagteam]

Repairs (effected on rental real estate) are expensed, they are not capitalized.