6A — December 14 - 27, 2018 — DelMarVa — M id A tlantic
Real Estate Journal
www.marejournal.com
D el M ar V a
By Brenda Muller, Asset Preservation “Fix-up” costs before sale & 1031 Exchanges
I
pense which must be depre- ciated: • Improvements: A tax- payer must capitalize any expense made to improve an investment property. An ex- pense is for an improvement if it results in a betterment to the property, restores the property or adapts the prop- erty to a new or different use. • Betterments: Expenses that may result in a better- ment to a property include expenses for fixing a pre- existing defect or condition, enlarging or expanding the property or increasing the capacity, strength or quality of the property. • Restoration: Expenses that may be for restoration include expenses for replac- ing a substantial structural part of a property, repairing damage to a property as a result of a casualty loss or rebuilding the property to a like-new condition. • Adaptation: Expenses that may be for adaptation include expenses for alter- ing the property to a use that is not consistent with the intended ordinary use of the property when initially purchased or held for invest- ment. Costs that can be deduct- ed as current expenses are amounts paid for incidental repairs and routine mainte- nance which are not added to the cost basis. Repairs are usually one-off fixes that help keep the property in good working condition and habitable. A real estate in- vestor can deduct the cost of minor repairs from the cur- rent year’s tax liability, but not from their capital gain tax liability. The IRS clari- fies in the 1040 Schedule E Instructions that “repairs in most cases do not add signifi- cant value to the property or extend its life.” For more information on basis and adjusted cost basis, read IRS Publication 551, Basis of Assets. For more informat ion about 1031 exchanges and how they can help Mid-At- lantic investors acquiring better performing real estate investment properties defer capital gain taxes, contact the author. Brenda Muller is the Mid-Atlantic division manager at Asset Preser- vation, Inc.
t is common for many Maryland and Virginia real estate investors
the 1031 exchange for the costs associated with im- proving or repairing the property immediately before the sale?” The answer is “no, not without generating a tax consequence”. The reason for this is that any exchange proceeds an investor re- ceives from a 1031 exchange are considered “boot” and are generally taxable to the extent the investor has a capital gain tax consequence. However, improvements an investor makes to improve a relinquished property can be added to the “cost basis”
of the property. In the most simplistic terms, cost basis is the amount a property is worth for tax purposes. The cost basis changes over time and becomes known as the “adjusted basis.” The ad- justed basis can be increased by capital improvements made to the property, and is reduced by depreciation deductions taken during the ownership period and other factors. Generally, the cost of add- ing capital improvements having a useful life of more than one year is added to
the adjusted cost basis and are referred to as a “capital expense” and must be capi- talized and depreciated over multiple years. An improve- ment includes enhancements that add value to the prop- erty, increases its useful life or adapts the property to a new use. Capital improve- ments can include room ad- ditions, new bathrooms, new roofs, decks, fencing, wiring upgrades, driveways, walk- ways, plumbing upgrades, and kitchen upgrades. The IRS uses the categories be- low to define a capital ex-
to make re- pa i r s , up - dates, and i m p r o v e - ments to en- hance a re- l inqui shed property in preparation f or l i st ing
Brenda Muller
with a real estate agent or broker. A commonly asked question by investors in the Mid-Atlantic region is, “Can I be reimbursed from
Mid-Atlantic 1031 Exchange Experts
Take advantage of smart 1031 exchange tax solutions
Asset Preservation, Inc. (API), is a leader, both in the Mid- Atlantic and nationally, in the 1031 exchange qualified intermediary industry. API is committed to providing investors the highest levels of experience, expertise and security of funds in the industry. API is relied upon by all levels of investors and Corporate America.
Brenda Muller Division Manager Asset Preservation, Inc. 954-329-9202 brenda@apiexchange.com
A National IRC §1031 “Qualified Intermediary”
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