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Quick investment property questions RE taxes

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Quick investment property questions RE taxes

Old 10-20-04, 10:59 AM
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Quick investment property questions RE taxes

If I were to buy a rental as an 'investment property' would the closing costs and the cost to fix it up be deductable?

i know if i bought a place as a residence they wouldn't be deductable which is why i am asking.
Old 10-20-04, 11:39 AM
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I have no clue here but it seems like it would be.
Old 10-20-04, 12:24 PM
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Paging kvrdave....
Old 10-20-04, 12:51 PM
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everyone asks this question on fatwallet lately. RE bubble is about to pop when your neighbor with no RE experience wants to get in one the money
Old 10-20-04, 01:01 PM
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The closing costs would go into your basis for the property and assuming a residential property, would be depreciated over 27.5 years.

Otherwise, repairs are a mixed bag. If you replace all the windows to upgrade them, it is a depreciable item, but if you fix a broken window, it is a repair and is written off entirely in the year you did it. The moral? Break every window before you replace them.

Items like carpet, roofs, etc. have different depreciation schedules as well.

Thus it is always better to "repair" than "upgrade".
Old 10-20-04, 01:23 PM
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Originally posted by al_bundy
everyone asks this question on fatwallet lately. RE bubble is about to pop when your neighbor with no RE experience wants to get in one the money
huh? so more people w/ no experience in RE is bad?
Old 10-20-04, 01:30 PM
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read through fatwallet's finance forum.

In a lot of areas RE prices have skyrocketed because investors have come in to flip new homes, and bid up prices of other homes for investment purposes. Reason it's happening is because people have been reading the paper for the last few years and seen prices skyrocket. They don't want to miss out. Just like the stock bubble a few years ago. In a few markets out west the investors have come and gone, and some are already looking at potential losses because the RE prices fell in their local markets.
Old 10-20-04, 01:32 PM
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Originally posted by kvrdave
The closing costs would go into your basis for the property and assuming a residential property, would be depreciated over 27.5 years.

Otherwise, repairs are a mixed bag. If you replace all the windows to upgrade them, it is a depreciable item, but if you fix a broken window, it is a repair and is written off entirely in the year you did it. The moral? Break every window before you replace them.

Items like carpet, roofs, etc. have different depreciation schedules as well.

Thus it is always better to "reair" than "upgrade".
Thanks for the info

What do you mean 'would be depreciated over 27.5 years?' regarding the closing costs.

This house needs new carpetting, new bathroom fixtures (1.5 bath) and some minor repairs so i take that the repairs would be deductable this year and the carpeting/fixtures are depreciation items? What if like the toilet is broken so replacing it in a sense repairs it?
Old 10-20-04, 01:34 PM
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Originally posted by al_bundy
read through fatwallet's finance forum.

In a lot of areas RE prices have skyrocketed because investors have come in to flip new homes, and bid up prices of other homes for investment purposes. Reason it's happening is because people have been reading the paper for the last few years and seen prices skyrocket. They don't want to miss out. Just like the stock bubble a few years ago. In a few markets out west the investors have come and gone, and some are already looking at potential losses because the RE prices fell in their local markets.
i'll keep that in mind.
Old 10-20-04, 02:30 PM
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Originally posted by schlitz100
Thanks for the info

What do you mean 'would be depreciated over 27.5 years?' regarding the closing costs.

This house needs new carpetting, new bathroom fixtures (1.5 bath) and some minor repairs so i take that the repairs would be deductable this year and the carpeting/fixtures are depreciation items? What if like the toilet is broken so replacing it in a sense repairs it?
Your "basis" is the total cost you are into a home. Let's say that you buy a home for $50,000 and your closing costs work out to be $1,000. We also have to determine how much the land is worth, because that can't be depreciated. So let's say (for easy numbers) that the land is worth $10,000. Now you have a house worth $40,000 and costs of $1,000. So your depreciable amount is $41,000 over 27.5 years. What that really means is that on your taxes for the next 27.5 years, you will take $1,491 off your income generated from the property (basically like an expense). So if somehow you managed to actually show $1500 profit from your property after all expenses, repairs, etc. your depreciation would give you a net profit of $9.

The flip side is that the property is depreciating, and let's say you go to sell it in 30 years. Let's pretend the market sucks in 30 years, and you sell it for $60,000. You are just happy to get out of it. You might think that your capital gain would be $9,000 which is the difference between what you sold for and what you bought for (with closing costs). Your actual capital gain would be $50,000 for taxes, because you have depreciated the property but still have $10,000 that the land was valued at that did not appreciate.

SO...you might think, "then I won't depreciate these things. I don't want to keep it that long, and would rather not "get screwed" on capital gains later on". Too damn bad The way the tax code reads, even if you don't take depreciation, your basis when you sell the property will be figured as though you always have.

To the rest of your question. This is just what I would do, and your comfort level may be different. Even though carpet probably falls under a depreciable item (of like 5 years, iirc), I would write it off in one year. I am currently replacing carpet in a place and the old carpet was about 18 months old. I consider it a repair in this case. I may pay for it if I ever get audited, but I can't imagine it is something they will spend much time and money on. My accountant has basically told me that if there is any way to write it off in a year, that is what we will do.

In fact, there is very little that I would actually call a capital improvement instead of a repair. The few things that I have would be furnaces, new roofs, etc. But it is pretty rare.
Old 10-20-04, 02:34 PM
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Originally posted by schlitz100
i'll keep that in mind.
I always think the idea of the real estate market "popping" is a funny statement. We have a large country. Huge. Lots of markets, and each is different. At any given time there are some that are in decline, and even in the worst of times, someone is making a profit (Rule of Aquisition #162, I believe).

So always do your homework, and in any market there is money to be made.
Old 10-20-04, 02:56 PM
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thanks for the in depth answer!

and your answer to the 'popping' is better then i would of came up with.
Old 10-20-04, 03:29 PM
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Originally posted by kvrdave
I always think the idea of the real estate market "popping" is a funny statement. We have a large country. Huge. Lots of markets, and each is different. At any given time there are some that are in decline, and even in the worst of times, someone is making a profit (Rule of Aquisition #162, I believe).

So always do your homework, and in any market there is money to be made.
\

it was the markets on the coasts that have really reached crazy levels. some others have too and have declined already.

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