Can an Owner Claim-Loss on Renovated Room?

My client owns an apartment complex, and recently did renovations with such renovations he was able to increase monthly rent on new tenants. He upgraded the whole complex including already rented apartments. Since he has leases that have not expired at a certain amount, which is lower than the new value of rooms, can he legally write off the difference between the rented apartments at the old rate and the soon to be rented apartments at the new rate?

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  1. 74 Answers

    Hi, your client has a few issues that should be addressed separately. First, the renovations should be capitalized as they add to the basis (value) of the building. The renovations will then be depreciated and he will be able to benefit from the additional depreciation expense derived from the new renovations.

    Regarding the rent, there is no way to foretell, that your client would be able to rent the renovated apartments at an increased rate. Although the apartments market value may have increased due to the renovations, he can not take a loss based on the assumption that he could get a tenant to pay more for the apartment. For example, if a tenant moves out and the apartment is empty he would not be able to claim a loss of rent. He can claim the ordinary expenses, depreciation etc. He can also increase the rent after the current tenant’s lease is over. However, he can not claim a loss based on the assumption that he can possibly get more rent. Also in lease or contract accounting, the owner or lessor is bound by the lease. If the lease states rent is a certain amount, then the lessor has to report the lease income at the contracted amount. The rental income is not determined by the fair market value but by the lease itself. I hope this helps!

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