When Repair Costs Are Tax-Deductible
QUESTION: I am interested in purchasing foreclosure properties, which I would repair and then sell. A neighbor suggests I could deduct from my taxes the improvements to these properties if I rent these properties and then sell them after the leases expire. What repairs qualify for tax deductions?
ANSWER: Repair costs for income properties, such as rental houses, qualify as deductible expenses on Schedule E where rental income is also reported. If you don’t rent the property to tenants then repairs are not tax-deductible and they become part of your cost basis for the house, like capital improvements.
For example, if you repair a kitchen cabinet in a rental house the cost is a deductible repair. But if you replace the kitchen cabinet, the cost is a capital improvement which must be added to the building’s cost basis and depreciated.
You can earn handsome profits either by immediately reselling the house after fixing it up or keep it as a rental property. The basic idea of fixing up the house is to increase its market value by more than the cost of the renovation work. If you buy foreclosures at substantially below-market prices, it will be hard not to earn a profit.
Sandwich Lease Can Benefit All 3 Parties
Q: A few years ago I signed a 20-year lease for a downtown parking lot I own. The lease can be canceled on one year’s notice, but at my age, 76, I am not about to give up the great income I get with no work. The parking lot operator has asked for my approval for him to lease the entire lot to a nearby bank that needs parking for its employees and customers. My income will increase slightly. What do you think of this idea?
A: The situation you describe is called a sandwich lease. The parking lot operator is sandwiched between you and the bank. I presume the bank will be paying a higher rent than you will receive, with the difference going to the parking lot operator.
Since the bank will be an excellent tenant and your income will increase slightly, I see nothing wrong with the sandwich lease situation you describe. Of course, have your attorney review the documents.
