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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11180
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have a rental property that has gh radon levels, can I

Customer Question

I have a rental property that has high radon levels, can I deduct the cost of the mitigation system in the tax year it was installed as a expense item, or do I need to deduct the cost of the system over time? I could not ethically rent the property one I knew about the high radon levels.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

That's an expense IF it was between renters ... that kind of expenditure, if done BEFORE property was placed into service needs to be capitalized as ANY repairs needed to get the property ready to rent.

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Was this an existing rental?

Expert:  Lane replied 1 year ago.

See this from the IRS' recent clarification on capital expenditures vs current year deducions

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Repair type expenditures made before the building or apartment is put in service (i.e. has a tenant) have to be capitalized. Although clean-up and repair expenses occurred over a few day lapse between an old tenant moving out and a new one moving in should be deductible as a ‘turnover’ expense.

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One of the examples given in the regulations is as follows:

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In year 1, X purchases a building for use as a business office. Prior to placing the building in service, X incurs costs to repair cement steps, refinish wood floors, patch holes in the walls, and paint the interior and exterior of the building. In year 2 the building is placed in service. Even if the things that were done did not constitute an improvement to the building or its structural components, the amounts paid must be capitalized as costs of acquiring the building because they were for work performed prior to X’s placing the building in service

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Consequently, if a taxpayer purchases a building which comes with the need to fix or repair a lot of deferred maintenance before being able to rent it, those expenses still must be capitalized; they are not a current deduction.

Expert:  Lane replied 1 year ago.

So again, if this was discovered after the property was already placed in service and had to be repaired before it could be rented again, it's an expense. (tax policy/logic here is that you are bringing it back up to where is was, in terms of it's usefulness in the activity)

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But if this was something that was done prior, EVER, to renting it out ... It's part of what had to be done to MAKE it rent-able in the first place, just as any other initial investment to get the property ready.

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The way any taxing authority will look at this is as follows:

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You decision to buy and invest, initially, is based on your costs to get the property in shape to rent ... If those costs are too much to make it a good investment, you don't buy.

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If you DO buy, then whatever you had to do to get the property ready to rent is a capital expenditure and is depreciated.

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Please don't shoot the messenger here :0)

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I hope you’ll rate me (using those stars, rating request, or faces on your screen) based on thoroughness and accuracy, rather than any good news / bad news content. That’s the only way I’ll be credited for the work here. But please let me know if you still have questions.

Thank you!

Lane

Expert:  Lane replied 1 year ago.

P.S.

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Rather than quoting simply from IRS, I thougth it might help to show you a very good interpretation of the new rules.

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Again nothing different from what I've told you, but a good reinforcement

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From the attorneys at nolo.com

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What Is an Improvement under IRS Rules?

Under the new IRS regulations, property is improved whenever it undergoes a:

  • Betterment
  • Adaptation, or
  • Restoration.

Think of the acronym B A R = Improvement = Depreciate.

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If the need for the expense was caused by a particular event--for example, a storm--you must compare the property's condition just before the event and just after the work was done to make your determination. On the other hand, if you’re correcting normal wear and tear to property, you must compare its condition after the last time you corrected normal wear and tear (whether maintenance or an improvement) with its condition after the latest work was done. If you’ve never had any work done on the property, use its condition when placed in service as your point of comparison.

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Betterments

An expenditure is for a betterment if it:

  • ameliorates a “material condition or defect” in the property that existed before it was acquired or when it was produced--it makes no difference whether or not you were aware of the defect when you acquired the unit of property, or UOP (discussed below)
  • results in a “material addition” to the property--for example, physically enlarges, expands, or extends it, or
  • results in a “material increase” in the property's capacity, productivity, strength, or quality.

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Restorations

An expenditure is for a restoration if it:

  • returns a property that has fallen into disrepair to its “ordinarily efficient operating condition”
  • rebuilds the property to a like-new condition after the end of its economic useful life, or
  • replaces a major component or substantial structural part of the property
  • replaces a component of a property for which the owner has taken a loss, or
  • repairs damage to a property for which the owner has taken a basis adjustment for a casualty loss.

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Adaptations

You must also depreciate amounts you spend to adapt property to a new or different use. A use is “new or different” if it is not consistent with your “intended ordinary use” of the property when you originally placed it into service.

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Hope this helps

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Lane

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