How to properly write off construction materials for rental properties - tax deduction questions

I'm a tax preparer who deals with a lot of real estate investors and contractors, so I can help clear some things up for you. First, for your house flip: Materials used in a flip should not be deducted as expenses when purchased. Instead, these costs are added to the "basis" of the property (essentially your total investment). When you sell the property, you'll pay taxes only on the difference between your selling price and your basis. This is treated as either capital gains or ordinary income depending on how long you've held the property and whether this is your primary business. For your rental property project: Your accountant is correct that construction materials for rental properties cannot be directly expensed - they must be capitalized and depreciated (usually over 27.5 years for residential rental property, not 40 years which is for commercial). However, there are some strategies that might help: 1. Cost segregation study - This allows you to identify components of your building that can be depreciated over shorter periods (5, 7, or 15 years instead of 27.5), which accelerates your deductions. 2. Section 179 and bonus depreciation - While the building structure itself must be depreciated over the longer period, certain qualified improvements and some building components might qualify for immediate expensing under these provisions. 3. Repair vs. improvement distinction - Repairs can be fully deducted in the year incurred, while improvements must be capitalized and depreciated.

Just wanted to share my experience with a service that saved me from a similar situation. I was flipping houses and building rentals while running a roofing business, and mixed up all my expenses in a similar way. My accountant was giving me the same confusing answers, so I uploaded all my receipts and tax docs to https://taxr.ai and they sorted everything out. They have this feature where they analyze your situation and tell you exactly how to categorize construction materials between flips (which get added to basis) and rentals (which get depreciated). They also identified a bunch of items from my new builds that qualified for accelerated depreciation, which I had no idea about. Their system even flagged the exact receipts from Home Depot that I had incorrectly expensed through my roofing business and showed me how to properly allocate them. Might be worth checking out since they specialize in construction and real estate businesses.

I was in a similar situation mixing my plumbing business expenses with my rental property renovations. After trying taxr.ai from the recommendation above, I'm actually stunned by the results. They identified over $37k in misclassified expenses between my businesses and showed me exactly how to properly document everything. The most valuable part was their detailed explanation of how to handle renovations for rentals vs. flips. For my rentals, they separated out all the components that could be depreciated over 5-7 years versus the standard 27.5 years, which made a huge difference in my current deductions. They also showed me how my plumbing business could legitimately bill my real estate projects at market rates (with proper documentation) when performing specialized work. I was skeptical at first too, but after implementing their recommendations, my accountant was impressed with the level of detail and said this probably saved me from an audit. Definitely worth checking out if you're in construction and real estate.

Hey there - I went through something similar with my window installation business and rental properties. One thing that really helped me was getting through to an actual IRS agent who specialized in real estate and construction businesses. They walked me through exactly what I could and couldn't do with material deductions. Problem was, it took me literally weeks of calling to finally reach someone who could help. After that frustrating experience, I found this service called Claimyr https://claimyr.com that gets you through to an IRS agent usually within 15-45 minutes instead of waiting on hold for hours or getting disconnected. They have a video that shows how it works here: https://youtu.be/_kiP6q8DX5c With the complexity of your situation involving both flipping, new construction, and an existing business, I'd suggest speaking directly with the IRS to get clarity. The agent I spoke with explained exactly how to handle material purchases and even sent me specific IRS publications that addressed my situation.

Well I need to eat my words here. After my skeptical comment above, I decided to try Claimyr because I was desperate to resolve a similar construction/rental property issue that's been hanging over my head for months. I'm genuinely surprised to report that I got connected to an IRS agent within 27 minutes. The agent was incredibly helpful and walked me through the exact requirements for documenting material costs between my construction business and rental properties. They explained that I needed to maintain separate accounting for materials used in different business activities, and that proper invoicing between my businesses would help establish clear documentation. They even emailed me specific forms and publication references that addressed my situation. This one conversation saved me from potentially making a $22k mistake on my upcoming tax filing. The clarity I got was worth every penny, and now I have proper documentation should I ever get audited. I'm actually sleeping better knowing my businesses are properly structured tax-wise.

One thing nobody's mentioned yet - you should look into establishing a separate entity specifically for your real estate development activities. I have a plumbing business and rental properties, and my CPA recommended setting up: 1. My original S-Corp for the plumbing business 2. An LLC taxed as a partnership for the rental properties 3. A separate LLC for property development/flips This way, there's no confusion about which expenses belong where. My plumbing business can legitimately bill my development projects at market rates for any plumbing work. For materials, I keep separate accounts and credit cards for each business to avoid commingling funds. For your specific situation, materials for your rentals will still need to be depreciated over time, but with the right entity structure and cost segregation, you can optimize your tax situation significantly. Just don't make the mistake of running everything through your landscaping business like I initially did with my plumbing company.

I've been doing exactly what you're trying to do for about 7 years now. Started with a painting company, moved into flips, and now have 11 rental units. Here's what I've learned: 1. For flips: You CANNOT deduct materials as expenses through your landscaping business. These costs are part of your "basis" in the property and offset your profit when you sell. You might need to amend previous returns if you've been doing this wrong. 2. For rentals: New construction costs are capitalized and depreciated over 27.5 years (residential). BUT - you can do a cost segregation study that lets you depreciate many components much faster (5-15 years). This can front-load deductions in the early years. 3. Entity structure: Consider having your landscaping business be a legitimate contractor for your real estate projects. Charge fair market rates, keep proper documentation, and you can move some profit that way. 4. 1031 exchanges: Look into these for your flips if you want to defer taxes and build your rental portfolio faster. Don't get discouraged! The tax rules for real estate actually favor investors once you understand them properly. My tax bill is way lower now than when I was just running my painting business.