The correspondent will purchase an income property, renovate the two existing housing units, and add a third unit in the basement if the necessary authorizations are received, and then resell the property within a year or two of the purchase.
If the renovation work, including work to add a third housing unit, is done by the correspondent’s spouse and the work is billed at fair market value, can the expenses of such work be capitalized to the building’s cost? For the purposes of this question, we have assumed that you are the sole owner of the building. After referring to the indicia in IT-128R, the Directorate stated:
[T]o the extent that this work creates a lasting benefit for your rental activities and/or is an improvement over existing housing units, we are of the view that the expenditures could be added to the capital cost of the building. Obviously, the expenses incurred for the addition of a third housing unit can be capitalized.