Rental Question

[nwtaxlady]

My client has a rental that has 2 separate units. One Upstairs and one downstairs. In past years it has always been residential rentals. The house is located in town and is zoned for commercial so she seeked out a commercial property firm to find her a commercial tenant (so she can charge more for rent) for only the downstairs unit.

Question #1. She got a tenant for a 3 yr lease. She had to pay this firm a % of the lease amount for the next 3 yrs. She paid them total of $4000. Do I put that all on the 2017 return since she paid it in 2017 and put it under management fee? They are not managing it, she is. It is more of a finders fee. Is it considered legal and professional fees and put the whole amount ($4000) there? Or where do I put it?

Question #2. Now that the bottom unit is commercial and the whole house has been residential rental in past and set up on depreciation as 27.5 yr. Do I keep it as is? The top unit will always be residential unit. So in 2017 she had a new roof put on. Would it be still go on as 27.5 yr?

[taxea]

My client has a rental that has 2 separate units. One Upstairs and one downstairs. In past years it has always been residential rentals. The house is located in town and is zoned for commercial so she seeked out a commercial property firm to find her a commercial tenant (so she can charge more for rent) for only the downstairs unit.

Question #1. She got a tenant for a 3 yr lease. She had to pay this firm a % of the lease amount for the next 3 yrs. She paid them total of $4000. Do I put that all on the 2017 return since she paid it in 2017 and put it under management fee? They are not managing it, she is. It is more of a finders fee. Is it considered legal and professional fees and put the whole amount ($4000) there? Or where do I put it?

Question #2. Now that the bottom unit is commercial and the whole house has been residential rental in past and set up on depreciation as 27.5 yr. Do I keep it as is? The top unit will always be residential unit. So in 2017 she had a new roof put on. Would it be still go on as 27.5 yr?

Q 1 I would use professional fee. I would also prepare a separate Sch E for each unit. The expenses could then be deducted as that paid for each unit. Any/all combined expenses would be allocated by sq ft of each unit (the new roof-if it cannot be considered a repair, the depreciation, utilities-if you pay them, other maintenance, insurance, mortgage, etc)

[TaxGuyBill]

Was the full payment due right away? If not, it would be amortized over the 36 month lease, so only the portion that applies to 2017 could be entered on the 2017 tax return. If it was all due in 2017, then it might be all deductible in 2017.


Unfortunately, the entire building probably reverts to 39 years. Unless 80% of the rents from the building is from Residential "dwelling units", everything is depreciated over 39 years (see §168(e)(2)(A)(i)).

https://www.law.cornell.edu/uscode/text/26/168#e

Even more unfortunate is if it is re-converted to a Residential property in the future. It then would re-convert to 27.7 years, but the depreciation period starts over. See §1.168(i)-4(d)(4).

https://www.law.cornell.edu/cfr/text/26/1.168(i)-4#d

[ttbtaxes]

I believe the commission has to be capitalized and amortized over the lease period regardless of the accounting method. Rev. Rul. 70-408, Rev. Rul. 81-161

[TaxGuyBill]

I believe the commission has to be capitalized and amortized over the lease period regardless of the accounting method. Rev. Rul. 70-408, Rev. Rul. 81-161

Thanks for finding that, I couldn't find anything if the full payment was required in the first year, so I was a bit unsure of that.

[Gene V]

I agree with the amortization--however, I wonder were this CPA firm comes up with the less then $5,000, can be written off in one year.

See attached link: http://perkinsaccounting.com/top-thi...r-should-know/

1) Lease acquisition costs (aka lease commissions)*

For tax purposes lease commissions must be capitalized and amortized over the length of the lease. Exceptions include:
• Where the term of the lease is less than one year, or
• The term of the lease is month-to-month, or
• Lease commissions that are less than $5000 per tenant.
In these three cases, the lease commissions can be deducted currently.

I wonder if they are trying to apply the De Minimis Safe Harbor Election?

[ttbtaxes]

I have no idea where the $5,000 comes from. Here is information from an Annual Tax Conference for Income Tax Issues for Lessors and Lessees. One of the two speakers was from Ernst and Young in DC so I suspect he is an expert in this area of taxation.

If you go to page 6 of the PDF he speaks directly to this issue and mentions nothing about the $5,000. Granted, this was back in 2005 but I can't think of anything since then that would exempts the first $5,000 for amortization.

http://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=1094&context=tax

[nwtaxlady]

Thanks everyone. I will amortize the cost for 3 yrs, since it is a 3 year lease. Now for the depreciation....

How do I handle the depreciation for setting it up for 39 years? Just start a new depreciation item for 39 yrs and then just put all prior under prior. It was all 27.5 years prior. Is that how I handle it, or is there something special I need to do?

[TaxGuyBill]

How do I handle the depreciation for setting it up for 39 years? Just start a new depreciation item for 39 yrs and then just put all prior under prior. It was all 27.5 years prior. Is that how I handle it, or is there something special I need to do?

I can't find exactly where it says it, but I have stuck in my mind that it takes place on January 1st. In other words, the whole year is depreciated over 39 years (if I'm right about that, but again, I can't find where it specifically says that now). At any rate, that is the easiest method. :-)

If that is the case, I would just keep the current asset worksheet and just change it to 39 years. It would then keep the prior (and correct) prior depreciation and "placed in service" date.



As a side note, my prior comment about re-converting it to residential would reset the "placed in service" date was only partially correct. That is the general rule, BUT there is an election to chose to NOT do that.

[nwtaxlady]

I can't find exactly where it says it, but I have stuck in my mind that it takes place on January 1st. In other words, the whole year is depreciated over 39 years (if I'm right about that, but again, I can't find where it specifically says that now). At any rate, that is the easiest method. :-)

If that is the case, I would just keep the current asset worksheet and just change it to 39 years. It would then keep the prior (and correct) prior depreciation and "placed in service" date.



As a side note, my prior comment about re-converting it to residential would reset the "placed in service" date was only partially correct. That is the general rule, BUT there is an election to chose to NOT do that.

I would keep it as a whole unit and change it to 39 yrs for the whole unit? Or split out top unit & keep as 27.5 and bottom put as 39 yrs ?

Thanks so much!

[TaxGuyBill]

I would keep it as a whole unit and change it to 39 yrs for the whole unit? Or split out top unit & keep as 27.5 and bottom put as 39 yrs ?

Thanks so much!

The entire unit. The determination for 27.5 years versus 39 years is determined by the "building or structure", and if less than 80% of it is for residential "dwelling units", the entire building needs to be 39 years.