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Form 8825 CPA discusses the 2013 IRS Repair vs. Capitalization Rules | Schedule E | a Rental Property CPA’s dilemma

Form 8825 CPA Schedule E CPA Rental Property CPA

2013 offers unique tax positioning strategies for rental property owners because you can choose between the old and new regulations for expensing and capitalization. (910) 399-2705.

Form 8825 CPAs expect to see more controversy in 2013 over the perpetual rental property dilemma; immediately writing off repairs, or, capitalizing and then depreciating them. Let’s establish a bit of philosophy and look at a few examples before summarizing the new regs. For 2013 rental property owners have the best of both worlds. Why? Because in 2013 you get to choose between the old and new IRS rules. So being proactive with tax positioning offers some great opportunities. Obviously taxes are only one part of managing your rental property. But they sure can affect cash flow.

I approach the problem a little differently than most rental property CPAs. My first concern? Whether my Form 8825 or Schedule E client really needs an immediate tax deduction. That question involves integrating an overall tax strategy for the Client, and not just looking at the rental property tax consequences by themselves. Remember rental property taxation issues change dramatically in 2013. Consult with your Form 8825 CPA. Or consider calling us for a free consult. Our virtual office means we can handle your rental property issues wherever you live.

Is an Immediate Tax Deduction best on Form 8825 or Schedule E?

Maybe, maybe not.

  • Example 1. Schedule E clients usually aren’t real estate professionals. So they’re subject to passive activity loss rules, and limited to a passive loss of $25.000 per year. Sometimes it’s better to string out deductions, through depreciation, to future years, when the rental property client has a better chance to deduct the loss..
  • Example 2. Form 8825 CPAs remember when rental property sold for high gains. Clients tend to forget that depreciation is re-captured when rental property sells, creating higher capital gains than expected.
  • Example 3. Cash flow issues. A Form 8825 client capitalizes a $30,000 new roof and then writes it off immediately through Section 179. But the client had to take a loan to pay for the roof. The immediate tax deduction is fantastic, but in later years the Client is still paying off the loan but can only use the loan interest as a tax deduction. Sometimes it’s better to match tax deductions to cash flow.

“It pays to look at the Client’s overall tax situation; now and for future years. This includes analyzing non Form 8825 and/or Schedule E issues.” 
– Gary Bode, Form 8825 CPA

OK, Here’s an Overview of the new Rules

  • After decades of insisting the rental property be depreciated as a single unit, the new regs recognize property elements like HVAC systems and roofs have different expected life spans. So, a new purchase of rental property in 2012 might be segregated into some sub components instead of a single unit. Surprisingly, it was only a few years ago the IRS disallowed that treatment in a famous court case.
  • If you do install a new roof, you’ll likely have to capitalize it. But, you can write off the remaining book value of the old roof. This means lots of calculations as the new regs essentially demand a change in accounting methods.

“In 2013, your Form 8825 CPA may have to deal with the proverbial can of worms over repairs, capitalization and write off of existing building components.”
– Gary Bode, Schedule E CPA

Lots of Tax Positioning Strategies Available for Rental Property in 2013

In 2013 rental property owners can pick and choose between using the old and new Repair vs Capitalization rules. This means unique tax positioning strategies exist for folks filing Form 8825 or Schedule E. If you’re expecting to sink money into repairs or upgrades to your rental property in 2013, consult with your CPA about how to optimize your tax situation. If you buy rental property in 2013, consult with your Form 8825 CPA for options on calculating the basis for the property.

I’m a Form 8825 and Schedule E CPA because my extended family owns rental property. So, I keep up on these issues. Please read any of the rental property, Schedule E, Form 8825, Form 1120-S etc. posts on this website to get a better feel for how I approach tax preparation. We’ve got a virtual office and can serve you wherever your rental property is. (910) 399-2705.

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