Cost of driveway to make apartment rentable

This sounds like a case of repair versus improvement to me. The driveway is new. Therefore it must be capitalized. I think the class life is 15 years.

"Dick Adams" wrote

Capitalized and depreciated over time.

It's not a recurring cost, and primarily, it's not fixing or replacing the old drive. It's new, it's a capital improvement.

Capitalized. You're adding something that didn't exist before.

For it to be a repair, the thing repaired must previously exist (among other requirements).

For starters, I'd be sure that the "in-law" suite was, indeed, legal. It's entirely possible that in that neighborhood such suites are illegal. Check with your local civic government, or the county if there isn't a civic government. Also, even if it is legal, there are various standards, e.g. ventilation, window size, fire department requirements etc.. Is it worth it to spend thousands on a driveway if additional thousands have to be expensed on updates required to meet various building/safety codes? Also, why is a driveway needed to access the suite? Wouldn't a simple sidewalk suffice?

Good question. Are you saying the in-law unit has no exterior door? If it does, how is a driveway required to access the external door? If not, how is a driveway going to avoid access through the main house?

-Mark Bole

These are all good and interesting questions, but will their answers, whatever they may be, alter the fact that this needs to be depreciated as a capital improvement?

That was the question in the first place - is it a capital improvement?

yes, but it is a capital improvement regardless of how necessary it is. If the unit can be rented without the driveway being added, and the driveway is added, it is still a capital improvement.

There's still more to it than that. Is the driveway a component of the in-law unit, or the rest of the residence? That will affect percent of business use.

And, why is it different from the TC decisi > Normally I would vote for capitalization. But this reminds me > of the Tax Court decision about the roof could be expensed > because without it, the house was not rentable.

Maybe because restoring a roof to its original leak-proof state is a repair, not a capital improvement? Oh no, here goes the roof discussion again... ;-)

-Mark Bole

Ah, so if there is already dirt there that a can (and perhaps once in a while does) drive on, just paving it over may be considered a repair rather than something new?

I haven't gone back to read Dick's case recently, but my guess is that it would be a tough sell.

No, filling in potholes in the dirt road, or removing vegetation, would a repair. Paving is an improvement.

-Mark Bole

A tough sell indeed!

It never ceases to amaze me that in spite of all my disclaimers to the contrary I have neighbors who still think I know squat about taxation.

I am told the in-law suite is legal and was previously rented. It turns out there is a rear door (not previously disclosed). But that door is in the rear of the house. The previous renter (20+ yeasrs ago) accessed it by driving on an undefined, unpaved access area along the side of the house - except when it was snowing, raining (or possibily when they had a cold - scarcasm intended).

His argument remains that this would be contractual requirement of the renter. To wit I have replied: Find someone willing argue your position to an IRS auditor and be able to do so with a straight face.

Dick

Well, you know more than they do! Or perhaps, as I often find among people who consult me, they know perfectly well what the rule is, but they hope I can find some loophole that will fix everything. I have been known to pull many rabbits out of hats, but I can't do it every time.

Contractual requirement of the renter? Do you mean that the renter requires that it be done, or that the renter is required to do it?

Perhaps the best way to handle it, if possible, is to have the renter pay for it and deduct it from his rent. That way it's in effect deductible: the landlord pays no tax on the improvement, and it doesn't add to basis.

Therein lies the rub. One of my many doctors asked me how he could deduct his children's primary and secondary tuition. I know how and it' tax fraud. But, if done carefully, it has probably less than a 1% chance of flagging an audit or being picked up on an audit. So I told him that my explaining to him would be as ethical as his explaining to me how to make synthetic heroin. That got my point across,

That would open the door to not declaring the rent deductions as income. So I'm not going to suggest that.

Dick

Oh, yeah. I hadn't thought about that.

Is the income the amount of rent deductions (might not be calculable, if the lease says "tenant will pay $X and build ") or the value of the required improvements? If the latter, measured when? (I'd suggest at the end of the lease; if it's renewed, it still ended.)

Or, suppose the tenant gets a lower rent for the course of a 5-year lease. Is the rent decrease taxable when (not) received? When is the improvement depreciable? That might match the two schedules.

Seth

The most vicious weapons an IRS auditor has are to deny all of a taxpayer's deductions and to assign income based on constructive receipt. So "if the lease says "tenant will pay $X and build ") or the value of the required improvements?", it looks to me like constructive receipt to the owner as of the date the improvements were completed.

Dick

And don't forget the collapsible transaction doctrine - if someone does something through a series of proper transaction and ends up with something that the law prohibits being done directly, the IRS can collapse the transaction and treat it as if it all happened in one step.

For example in this case the landlord and tenant could renegotiate the lease to give the tenant a rent reduction in exchange for his building the driveway. The steps are proper, but taking it all as one transaction it can be treated as the same constructive receipt you note.

If the lease is for 5 years, and specifies that the landlord may not use the driveway during the course of the lease, is the constructive receipt when the driveway is completed or at the expiration of the lease?

Seth