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Rental Property Cost Basis Calculations - YouTube
Channel: Toby Mathis Esq. | Tax & Asset Protection
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(light music)
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- [Jeff] If I purchased a rental,
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38k plus 18k for repairs.
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When I sell the rental,
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should the cost basis be the home,
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uh oh, I'm sorry should
the cost basis of the home
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be 38k or the cost plus repair.
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And I think we sometimes have
differing opinions on this.
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- [Toby] Mm hmm.
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- [Jeff] I'm kind of of the
opinion that if you buy a house
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on the cheap for 38 thousand dollars,
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that with some improvements
could be worth a lot more,
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you're probably doin'
capitalizeable expenses.
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- [Toby] So what Jeff is
saying is there's two types of
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things, of work, you do on your house.
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One adds to it's useful life,
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the other one is just to fix something.
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- [Jeff] Right.
- [Toby] So it's repair
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versus renovation.
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If you spent 18 thousand dollars,
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that does not sound like a repair.
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That sounds like a renovation
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and you would add that to your basis.
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So the cost basis would be increased.
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If you are repairing something,
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like hey something was broken
and you're just fixing it,
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and you're not adding to the useful life
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of the actual properties,
like you're fixing a driveway
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or you're fixing the door.
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Those you wouldn't add to the basis,
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you'd write those off immediately.
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- [Jeff] Right.
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- [Toby] And here's the trick,
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there's a safe harbor that says
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if the invoice is less that
twenty five hundred dollars
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you can write it off, absolutely.
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And they can't question it.
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If it's I think about to 5,000,
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we were just talking about that
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where you have to get some
sort of audited financial.
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But I'm not going to go that route.
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I'm just going to say if it's
less than twenty five hundred.
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So if you have somebody
fixing up on your house,
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have them make sure that they invoice you
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less than twenty five hundred.
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You could treat it as a
repair and write it off now
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versus spreading it out
over 27 and a half years.
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Somebody asked this by the way,
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they asked about cost segregation.
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And the rule on that is,
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on a typical house, like on this house,
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56 thousand let's say
it was all renovation.
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They didn't repair anything,
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they basically fixed this house up,
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replaced it's roof, it's
floor and everything.
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Typically you'd be writing that
off over 27 and a half years
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What cost segregation says
is hey I can break out
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the carpeting, I can break
out the ceiling fans,
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the lights, the light switches
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and I can write those off immediately.
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And it's basically taking the improvement
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and breaking it into pieces.
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What that usually gets you is an extra
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20% to 30% on the first year.
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- [Jeff] Right.
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- [Toby] So on a house like this,
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you could do a cost seg, if it's 56,
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you're probably going to get an extra
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10 thousand dollars write off
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or you use the safe harbor
and get the same thing
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without having to do a cost seg
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by making sure that
they're invoicing you less.
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- [Jeff] And something
I think a lot of people
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don't understand about
the cost segregation
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is yes it does decrease,
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can decrease your income
dramatically in that first year.
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But later years you're going
to have slightly higher income.
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- [Toby] Yeah and then, somebody says
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does the property have to be in service
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to get the twenty five hundred.
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Yes, it's repaired.
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It has to be something that you're using
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as an investment property.
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So it's not your home.
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- [Jeff] Cause we know
a lot of repairs happen
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in between tenants and
things of that nature
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when it's not being occupied.
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But it's still available for rent.
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I mean you are looking for somebody
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but you're just doing repairs in between.
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- [Toby] Somebody asked,
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California taxes worldwide
and they're in debt.
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Yes.
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There's this thing,
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when you spend more than you make,
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doesn't matter how much you make,
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you're still going backwards.
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It's like I lose money on every unit
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but I'll make it up in volume.
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- [Jeff] We never said they
use their money wisely.
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- [Toby] Yeah.
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(upbeat music)
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