My scope keeps drifting against the substantial improvement math
Bought a brick fourplex in a designated tract in March. Purchase was 265k. My accountant allocated 78k to land and 187k to the building, which means the improvement number I have to hit is roughly 187k of work on the building within 30 months to satisfy the substantial improvement test. Land basis doesn't count toward that as I understand it, which is the part that surprised me.
Original scope was 210k. Then the back stair failed inspection, then we opened the second floor ceiling and found the old knob and tube feeding two units, and now the number on my spreadsheet is 268k. So I am past the improvement threshold with room to spare. Fine on the tax side. Not fine on the money side, because the extra 58k came out of a reserve I wanted for lease-up.
What's actually on my desk: the electrician wants to do a full service upgrade to 200 amp per unit for another 31k. I do not need it for the improvement test, I already cleared that. I might need it in ten years, and ten years is the hold I am aiming at because that's where the appreciation treatment goes.
So do I spend 31k now on something that helps operations and nothing else, with reserves already thin, or do I close the scope, get units rented, and revisit in year three? I keep talking myself into both. My rent assumption is 1,450 a unit and I have zero comps in the tract above 1,300, which is its own problem.