BRRRR & Taxes: A Complete Tax Guide to the Buy–Rehab–Refi Strategy

If you’re doing BRRRR deals, the tax savings can be significant—but only if you categorize costs correctly, track basis properly, and understand what a cash-out refinance does (and does not do) to your taxes. This guide walks you through each BRRRR stage with practical examples and common pitfalls.

What BRRRR is (and why taxes matter)

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. The strategy works because you (1) buy distressed or undervalued property, (2) add value through rehab, (3) stabilize it as a rental, then (4) refinance based on the higher appraised value to pull cash out—ideally tax-efficiently.

Taxes matter in BRRRR because the biggest wins usually come from:

• Getting basis right so you don’t under- or over-depreciate.
• Classifying rehab costs correctly (deduct now vs. capitalize and depreciate).
• Capturing accelerated depreciation when appropriate (e.g., cost segregation).
• Understanding the refinance so you don’t accidentally create non-deductible interest or mess up your records.

Important framing: BRRRR isn’t “tax-free,” and a refinance is not a magic wand. The strategy works best when your accounting is clean and your documentation can survive scrutiny.

The big tax idea: basis, capitalization, and depreciation

Most BRRRR tax issues reduce to one concept: what gets added to basis vs. what can be deducted currently. In general:

Type of cost	Typical tax treatment	What it affects
Purchase price (building portion)	Capitalized (added to basis)	Depreciation over time
Closing costs (some)	Often capitalized to basis	Depreciation / gain or loss on sale
Loan costs (points/origination, etc.)	Often amortized over loan term (facts dependent)	Annual deductions over time
Repairs & maintenance	Often currently deductible	Reduces taxable rental income
Improvements (betterment/restoration/adaptation)	Capitalized (added to basis)	Depreciation (and potential recapture on sale)

The “repairs vs. improvements” line is governed by the tangible property regulations and related safe harbors. Classification should reflect what was actually done and why.

Stage 1 — Buy: acquisition costs and financing

1) Purchase price allocation: land vs. building

Depreciation applies to the building (and certain components), not land. You should allocate purchase price between land and building using a reasonable method (commonly the property tax assessment ratio or an appraisal allocation).

2) Closing costs: what typically gets capitalized

Many acquisition-related costs increase the property’s basis (and therefore reduce gain on sale, while increasing depreciation if allocated to depreciable basis). Examples commonly treated as capitalizable acquisition costs include certain legal/title/recording fees directly tied to acquiring the property.

Practical tip: Maintain a “Sources & Uses” schedule for every BRRRR deal. You want a clean audit trail from the settlement statement, to bank transactions, to your fixed asset schedule.

3) Financing: loan proceeds are not income

Borrowed money is generally not taxable income because you have an obligation to repay it. This becomes especially important at the refinance stage (cash-out).

Stage 2 — Rehab: repairs vs. improvements (and safe harbors)

Rehab is where most BRRRR investors accidentally lose deductions or create messy books. The IRS framework generally asks whether your spending: (1) betters the property, (2) restores it, or (3) adapts it to a new or different use. If so, it’s generally an improvement that must be capitalized.

Common rehab items and typical treatment

Item	Often treated as	Notes
Fixing leaks, patching drywall, replacing broken fixtures	Repair (current deduction)	Facts matter—scope and context drive treatment.
Replacing an entire roof	Improvement (capitalized)	Typically a restoration of a major component.
Kitchen remodel / new cabinets / layout change	Improvement (capitalized)	Often a betterment/restoration.
New HVAC system	Improvement (capitalized)	Generally a major component/system.
Turnover paint between tenants	Repair/maintenance (often deductible)	Usually routine maintenance; document the recurring nature.

Rehab documentation checklist (minimum viable):

• Invoices with scope details (not just “labor”)
• Before/after photos for major work
• Permits and inspection records (if applicable)
• Separate tracking for materials vs. labor
• A fixed asset list for capitalized items (date placed in service, category, cost, life)

Where investors get burned: “big rehab” + trying to expense everything

If you buy a property in poor condition and your rehab puts it into rentable condition, a meaningful portion of the work is often capital in nature. You don’t want to be the investor who calls a full gut rehab a “repair” without a defensible position.

Stage 3 — Rent: operating expenses and depreciation

1) When depreciation starts: “placed in service”

Depreciation generally begins when the property is placed in service as a rental (generally when it is ready and available for rent), not necessarily when you close or when you find your first tenant.

2) What depreciates (and over how long)

Residential rental property is generally depreciated over a long recovery period (commonly 27.5 years for the building under the general depreciation system), while certain components (appliances, flooring, some land improvements) may have shorter lives depending on classification.

3) Operating expenses (the “easy wins”)

Typical deductible operating expenses for rentals include items like advertising, cleaning, property management, utilities you pay, routine maintenance, insurance, and similar costs—assuming the rental is operated for profit and substantiated.

Important: Depreciation deductions reduce your basis. That often increases taxable gain later (including depreciation recapture concepts). Plan for the exit at the beginning, not at the closing table.

Stage 4 — Refinance: cash-out refi, taxability, and interest tracing

1) Is a cash-out refinance taxable?

In most cases, no. A refinance typically creates new debt; loan proceeds are generally not income because you must repay the lender.

2) The tax trap: the interest deduction depends on how you use the money

Here’s the part many investors miss: interest deductibility often follows the use of the loan proceeds. If you cash out and use funds for personal spending, you may convert what you assumed was deductible rental interest into non-deductible personal interest (or interest limited under other rules).

Important Rule: It’s not about what the loan is secured by. It’s about what you spent the borrowed money on. Track refi proceeds like a hawk.

3) Good uses of refi proceeds (from a tax-positioning standpoint)

• Funding additional rental acquisitions (investment use)
• Paying for capital improvements on rental property (investment/business use)
• Paying transaction costs directly tied to investment activity

4) Recordkeeping for refinance proceeds

If you do nothing else, do this: deposit refi proceeds into a dedicated bank account and pay investment expenses from that same account. Mixing funds is how you lose the interest deduction argument.

Numerical example: a BRRRR deal from purchase to cash-out refi

Let’s walk through a simplified example to show how the tax mechanics connect across the BRRRR cycle. (This is illustrative; your facts and tax outcomes will vary.)

Deal facts

• Purchase price: $200,000 (assume $40,000 land, $160,000 building)
• Closing costs capitalized to basis: $6,000
• Rehab spend: $60,000 (assume $15,000 repairs; $45,000 improvements)
• Placed in service as a rental: mid-year
• After-rehab appraisal: $325,000
• Cash-out refinance: 75% LTV = $243,750 new loan
• Net cash-out after paying off old debt/costs: $70,000

Step 1: Build your depreciable basis

Start with building basis and add capitalizable costs and improvements:

Component	Amount
Building basis	$160,000
+ Capitalized closing costs (allocated to building for simplicity)	$6,000
+ Capital improvements	$45,000
= Depreciable basis (simplified)	$211,000

The $15,000 of repairs are generally treated as current expenses (assuming they qualify as repairs/maintenance under the facts), reducing rental taxable income in the year incurred.

Step 2: What does the refinance do to taxes?

The $70,000 cash-out is typically not taxable income. But the interest deduction on the portion of the loan tied to that cash-out depends on what you do with the $70,000.

• If you use it to buy another rental: the interest is generally positioned as investment/business interest.
• If you use it to remodel your personal residence: the interest may be limited or treated differently.
• If you use it for personal spending: you may lose deductibility.

BRRRR math meets tax math: The refinance is often the “repeat” fuel. Just make sure it doesn’t also become the “deduction killer.”

Common mistakes that trigger missed deductions or IRS headaches

1. Expensing everything in rehab.
   Fix: Separate repairs vs. capital improvements contemporaneously; keep scope documentation.
2. No basis schedule.
   Fix: Maintain a living basis worksheet: purchase allocation, improvements, dispositions, depreciation.
3. Starting depreciation too early (or too late).
   Fix: Document “placed in service” date (ready and available for rent).
4. Commingling refi proceeds.
   Fix: Dedicated account for refi proceeds; pay investment expenses directly from it.
5. Forgetting depreciation recapture planning.
   Fix: Model exit scenarios before you sell; depreciation affects gain characterization and tax outcomes.
6. Poor substantiation.
   Fix: Save invoices, contracts, before/after photos, permits, and proof of payment.

FAQ

Does BRRRR work differently for short-term rentals?

Potentially, yes. Short-term rentals can change how participation and losses are treated, depending on the facts and how the activity is structured. The BRRRR mechanics (basis, capitalization, depreciation, interest tracing) still matter regardless of rental type.

If I refinance, can I “deduct the cash-out”?

You don’t deduct the cash-out itself. It’s generally not income. The key deduction question is the interest: how it’s allocated depends on what you did with the borrowed funds.

Can I deduct my rehab costs if I haven’t rented it yet?

It depends on the nature of the costs and whether the property is in service. Many improvement costs are capitalized regardless; certain operating expenses may be limited or treated differently before the property is ready and available for rent.

Should I do a cost segregation study on a BRRRR property?

Sometimes. Cost segregation can accelerate depreciation by identifying shorter-lived components. The economics depend on purchase price, rehab scope, expected holding period, your broader tax profile, and passive activity considerations.

What’s the cleanest bookkeeping setup for BRRRR?

Use (1) a deal-level “Sources & Uses” worksheet, (2) a fixed asset schedule for improvements, (3) a dedicated bank account for refi proceeds (if cash-out), and (4) a chart of accounts that separates repairs/maintenance from capital improvements.

Next steps + BRRRR Tax Strategy Worksheet

If you’re actively buying and rehabbing properties, you should have a repeatable system for: (1) classifying rehab costs, (2) tracking basis, and (3) documenting refinance proceeds.

Want a tool to keep this clean? Download our BRRRR Tax Strategy Worksheet (sources & uses, basis tracker, rehab classification, and refi proceeds log).

Download the BRRRR Tax Strategy Worksheet (Excel)
Book a planning call with The RVA Accountant, PLLC

Disclaimer

This article is for educational purposes only and does not constitute tax, legal, or accounting advice. Consult with your tax advisor before implementing any strategy discussed here.