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New Real Estate Investor mistakes - Capitalization of Improvements
Here is a mistake that new real estate investors make? Thinking they can write off the amounts they spend to improve the property. Sometimes you can. Often you can not. Here is why: Any expenditure that increases the life of the property or improves its utility needs to be depreciated over the next 27.5 years (if the property is residential) or over 39 years (if the property is nonresidential). You can not, therefore, write off the money spent improving or renovating a house, except through depreciation. I have seen new real estate investors in tears about this wrinkle. Some investor draws, say, $20,000 from his IRA or 401(k) to fix up some rental. He figures he will be able to write off the $20,000 as a tax deduction in the year improvements are made. No way. Instead, he will have to write off the $20,000 at the rate of a few hundred bucks a year over the next three or four decades. The trick with renovation, if you want to call it that, is to keep the property well maintained as you go. Repainting, new carpeting, general repairs; these items should all be all deductions in the year of expenditure.
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