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When can I record an asset? Start depreciation? I'm in a…

When can I record...

When can I record an asset? Start depreciation? I'm in a partnership, started March 2017. We were gifted a house last year (around November/December) and immediately started paying vendors to get the house ready for rental. We replaced the HVAC heat pump, got water connections, paid for cleaning, etc. However, the deed was not recorded until Feb of this year. When can we record the asset on our books? Can we expense the items that we already spent money on last year?

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3/14/2018
TaxRobin
TaxRobin, Senior Advisor
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Hello, I'm Robin. Welcome to JustAnswer. I'm reviewing your question now and typing up my reply. I'll post that in just a few moments.

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The asset is recorded when the partnership received it, Feb by ownership transfer.

The costs to rehab are added to the basis of the property. Depreciation of asset is not started until it is available for rental use. You may not expense costs to rehab. Those are all added to the basis and will increase value for depreciation purposes.

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Customer reply replied 1 month ago
OK. What about the other ancillary costs like painting, cleaning fees? I understand that I'll need to capitalize the HVAC repair and water connection, but what about other costs that don't extend the life of the property? Can I not deduct those as incurred?

You add that to the cost of the property too. You cannot claim any expenses until the property is available for rent.

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Customer reply replied 1 month ago
Further, without me booking those expenses, it makes my cash on hand appear higher than it should me at year end. So, my balance sheet is off by the amount of the HVAC repair and water connection.

You can book them you just cannot claim them for expenses against tax until the property is available for rent.

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Customer reply replied 1 month ago
Thanks, ***** ***** to confirm, although it was ready for rental use in January, we cannot claim any deductions until Feb, the month of the deed transfer?

If it was ready and you advertised and a tenant could have moved in then you can start in Jan.

You can run the full year for depreciation. As long as the contract was signed and all was in the partnership that would be fine.

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Customer reply replied 1 month ago
Got it. We did not advertise in like a bulletin or anything, but a family friend lives there. The lease was signed for March because we gave them an abatement for Feb rent. Does that matter at all? The lease is dated Jan 13th, but the rental period starts March 1st.

My judgement would be if the lease was signed in Jan and you could not lease to anyone else after the signing then go with Jan.

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Customer reply replied 1 month ago
OK...Thanks for your help!
Customer reply replied 1 month ago
Can you provide any IRS guidance surrounding the capitalization of rehab costs? Like an IRS publication, regulation, of some sort?
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Basis of Assetshttps://www.irs.gov/pub/irs-pdf/p551.pdf
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