Since it's almost tax season (time) I thought I'd share what happened at the first audit I had with the IRS. Lucky me it was a training audit for future agents-- whoopdee do!!!!

They had my first tax return from my rental business. Agent looking at each and every number-- checking depreciation schedules and his books to try to catch anything. Like I said in training. After 4 hrs on a simple return I asked for the supervisor and she was very nice and kind. I mentioned everyone else had gone to lunch and that we didn't appear to be close to finish.

Long and short-- I asked the training lady -- since the agent said my dep schedules were all wrong-- why is my auditor using a depreciation schedule from 2 years prior-- that was the first win.

Here is when i really learned. My first rental I spent a fortune on fix up. Took all my deductions. Well idiot me didn't know that just because some slick RE instructor said something --- didn't make is so-- with the IRS. The lady looked at my doc about deducting materials cost from project and said that maybe what they told you but you need to add this back to the cost bast of the property-- since it wasn't a rental when you expended to purchase these items. She said at that point you didn't really have a rental yet-- since you never had a tenant. She was kind enough to just make me pay the 9% penalty not the 25%.

That's something I learned too. Now I have a new approach. The day after I get a place, I rent it out as is. There is always someone who will take it. I may have to take a lower rent rate due to conditions, but that's only fair. The govt does not like "deals" where rent is far below market value, so the thing is to take lots of pictures and document the as-is current condition to warrant the amount of rent. If rent would normally be $500 and the place is in need of a lot of work, maybe $150-200 would be fair.

Once the place is rented, I can then do needed repairs. The tenant and I can work around the problems (a cooperative tenant goes a long way).

Just follow the rules.

Marv no. 1099.

Thank you for sharing your experience with the IRS audit.

How does that work out in difference tax wise, if you repair first, then rent, and add to the basis vs. rent first then repair, and count it towards expense?

If I am reading into yours and Richard's responses correctly, it must work out better tax wise to do the latter, but why?

Is it allowed to plan and buy/bill to other property's. Pre purchase?

I don't see how they wouldn't bust you on that?

6bye the reasoning is logical I think. If its never been a rental for you how can you say fix up was a rental expense? This is one reason we tried to pass on any investment RE that required MAJOR rework. You could put 20K into a project and not be able to get the deduction the year you incurred the expense. so rather then get a deduction this year-- you add it to the cost of the house and divide by 27 yrs. you don't recoup your expense.

Now if you have some propertys-- you could in theory pre plan the expenses and purchase and bill to existing property's. who to say in 4 or 5 years where you actually used the stuff?

Not that I would ever do that. just saying I heard that was happening.

6X6 Tax wise, keep in mind, a true repair is usually an expense. Expenses are deductible in the year you make the repair, if you are renting the property out.

If you add the repairs to the basis of the property over 27 years, it becomes a depreciation. A depreciation must be paid back at some point, currently if you sell, at 25%.

PMH is spot on. The place has to be marketable.

They don't say how or marketable for what? Just that there is an opportunity to make an economic profit.