Writing Off Rehab Costs
My wife and I are considering our first REI in purchasing and rehab'ing a REO. We plan to eventually rent the property out but will likely live in it for a period of time prior to renting it out.
Unless I'm mistaken if it were strictly a rental the cost of the rehab could be written off against rental income... which would mean that it's possible to show a loss in the first year.
My question is this:
If after we purchase and rehab the property, my wife and I live in the home for some period of time prior to renting it out can I still deduct the cost of the rehab ? What are the criterion for determining whether the cost of the rehab is tax deductible ?
Any and all input is greatly appreciated.
- Mike
edit: for clarity[ Edited by Talas213 on Date 05/04/2004 ]
I am not 100% sure, but I don't think you can deduct any rehab cost from your rental income at all. First of all, you are buying this prop as a primary residence. Whatever you spend on the prop to rehab comes out of pocket, and no deduction is allowed.
Second of all, if this is strictly a rental prop, the rehab cost should be capitalized and depreciated over years (there are three (or four?) different depreciation schedules).
Your best bet is to talk to your CPA.
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Moderator note: The depreciation schedule for rehab costs is the same as the schedule for the building/structure -- 27.5 years for residential rental property.[ Edited by DaveT on Date 05/05/2004 ]
Whether you occupy the property as your principal residence or intend to use it for a rental property, your rehab cost is a capital improvement.
The cost of your rehab is added to your cost basis for the building/structure. When you eventually place the property in service as a rental, you take a residential rental property depreciation expense over 27.5 years. You eventually recover your rehab cost through depreciation. If you later sell the property, your higher cost basis reduces your taxable profit.
Rehab costs are never "deductions" againt rental income.