Capital Expenditure when converting primary resident to rental

[vdo]

CA

I will be receiving a small cash lump sum and want to use it to expand my primary resident and then convert it to a rental. I just want to make sure that the money is considered as captial expenditures when spent on building out or repairing this rental property thats converted from a primary resident.

Is there anything I need to be concerned about and is there a specific sequence I need to follow? I read that I might need to rent it out first and then build it out after. thanks

 

[Taxing Matters]

CA

I will be receiving a small cash lump sum and want to use it to expand my primary resident and then convert it to a rental. I just want to make sure that the money is considered as captial expenditures when spent on building out or repairing this rental property thats converted from a primary resident.

Improvements to the property, like an addition or expansion, are capital expenes and thus additions to basis whether the improvements are done before you convert to a rental or after. Once the property becomes available to rent you will start to depreciate the building and improvements (but not the land). So you cannot deduct the full cost you incur in the year you pay for the improvements. You recover them over the depreciation period.

Regular repairs to the property are not a capital expense; they are an ordinary expense but that expense is not deductible while it is your personal residence. Repair costs you incur after you put the place in service as rental are deductible.

IRS publication 527 has a lot of good information on the tax treatment of residential rental property. I suggest you review that, it will likely answer most of your questions. It is available here: https://www.irs.gov/pub/irs-pdf/p527.pdf

 

[FlyingRon]

TM gives you the direct poop on the fix up costs. But, wait, there's even more considerations...

Further, you start to lose the capital gains exclusion the minute you put the thing into rental use rather than using it as your primary residence. You're probably better off selling the house and buying another rental property than converting the existing one.

Of course, it gets even more fun if you intend to stay in the house (only renting out part). You'd probably want to talk this whole thing over with a tax advisor.

Is there a mortgage still in force?

 

[adjusterjack]

CA

I will be receiving a small cash lump sum and want to use it to expand my primary resident and then convert it to a rental.

When your tenants destroy it all, you'll wish you hadn't.

 

[Taxing Matters]

TM gives you the direct poop on the fix up costs. But, wait, there's even more considerations...

Indeed there are, including non tax considerations. One of those being that using the property as a rental might not be a great investment. Selling the home and taking advantage of the capital gains exclusion for a personal residence and then using the sales proceeds for some other investment may turn out much better financially without all the headaches that go with being a landlord.