What are the tax implications for fixing up a house thatyou don’t yet own?

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What are the tax implications for fixing up a house thatyou don’t yet own?

After probate is completed, I’m planning on buying my parents’ house from my sisters. I can’t buy the house now as I don’t have the ability to pay full price. Once the rest of the estate is settled, I’ll have the finances to purchase the house. I’d like to start fixing up the house now to prepare it for renting after I formally own the house in January/February. I’m concerned that I won’t be able to write off any of the fix-ups I do before I formally own the house. Is there a way to fix the house up now without loosing the benefit of writing these things off?

Asked on October 20, 2010 under Real Estate Law, Maryland

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

That is correct; you would have no ability to take tax cognizance of work done on a house prior to owning it. Also note: generally speaking, renovations in a home affect your tax basis in the home, but are not things you can write off; renovations made as part of a business--e.g. as landlord--would be something you can take a business expense, but you effectively need to have the business running and generating income to actually take advantage of deductions. Timing is, if not everything, very important in a case like this.

You should speak with a tax advisor. Much will depend on how  you do the actual accounting for the business. For example, if you will and could run it on a cash (not accrual) basis, what matters is when expenses are paid; therefore, if you could work matters out so you don't pay for the bulk of the work until the year you own the home and start renting it, you may be able to take tax benefit.

There is no simple answer--it depends on how you will structure the business, when it will start, how and when you pay for repairs, etc. You need to sit down with a tax advisor and plan this out. In the meantime, if there's anything you'd be doing yourself on the home, do that--you can't deduct your own elbow grease anyway, so you may as well put in your sweat equity now, when it doesn't matter.

M.T.G., Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

I would not do anything to the house at all unless and until you have a contract for sale from the estate and an agreement with all the other beneficiaries about the work that you are doing.  What if your sisters decide that they don't want to sell to you?  Your fixing up of the house will be seen as gratuitous without any writing in place.  You can not write off the work until you own the house.  The estate can fix it up and then the money spent deducted from the estate funds but then the price of the buy out will rise I am sure.  I would consult with an attorney outside of the estate for help here with preparing the documentation that you need to protect yourself.  Good luck.


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