How to claim 2018 startup expenses for Airbnb rental that will begin operating in 2019

[dennymoody]

Hi, beginning in April 2019, what is now my primary residence will become a full-time Airbnb rental. I spent a couple thousand dollars towards the end of 2018 buying supplies for the new rental. This includes items such as premium mattresses, a smart deadbolt for keyless guest entry, guest towels and linens, etc. I didn't have any rental income in 2018. What form do I use to deduct these startup expenses? 

[Carl]

You will NOT report anything for this on your 2018 tax return. Not one penny. But do keep all your receipts and other paperwork. Startup expenses are claimed in the first year you are "open for business", and it does not matter what year those startup expenses were incurred. So since you were not "open for business" on or before Dec 31, 2018 you have *nothing* to report concerning this, on your 2018 tax return. Not one penny. You'll deal with it on your 2019 tax return when you file it next year. *KEEP* *YOUR* *RECEIPTS*.

[dennymoody]

Got it. Thanks for the help!

[ntimken]

What if he was trying to rent in 2018 but didn't.

Where would he go in Turbo Premium in order to enter these expenses (startup), depreciation,  in the program?

[Carl]

Then it's a waste of time and effort to even declare the business as open in 2018. Since your startup expenses can only be deducted from business income, and you have no business income to deduct them from in 2018, why bother? Wait to declare the business open in 2019 and claim your startup expenses then.

[ntimken]

Thanks Carl, great idea! I assume since I earn over $150k in income, I cannot take any losses whatsoever on the startup costs of $10k to furnish and supply the place, but have to deduct it against 2019 income.

Can any mortgage interest or depreciation be taken, or does our income or the $24000 standardized deduction foreclose this.

[Carl]

Wait now. You said you're renting this out via AirB&B. That tells me that this is NOT a long term rental, but instead meets the necessary qualifications to be a SCH C business, just like a hotel or Bed & Breakfast operates. If so, then your income in irrelevant here. You are confusing the income limits that apply to rental property reported on SCH E. For a SCH C business, if you have a million dollars of income from anywhere it doesn't matter. Your startup costs are deductible on the SCH C.
Now if this is a case that you do not meet the requirements to be a SCH C business, then the limits apply.

[ntimken]

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@Carl wrote:

Wait now. You said you're renting this out via AirB&B. That tells me that this is NOT a long term rental, but instead meets the necessary qualifications to be a SCH C business, just like a hotel or Bed & Breakfast operates. If so, then your income in irrelevant here. You are confusing the income limits that apply to rental property reported on SCH E. For a SCH C business, if you have a million dollars of income from anywhere it doesn't matter. Your startup costs are deductible on the SCH C.
Now if this is a case that you do not meet the requirements to be a SCH C business, then the limits apply.

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I don't think we meet the requirements for a Schedule C business. (I don't know what they are).

We bought the place in Oct 2018 as a vacation place to rent out till we retire in a few years. The place was empty. We spent $10,000 to furnish it and for supplies so someone could live in it as a rental. It cost us about $4000 to fly down there 3 times, rent a car and hotel room.   It was ready to live in and rent in Dec. 2018, but we didnt get a tenant till Jan 2019. (We could declare it not ready till 2019 as you said).  The tenant paid us about $8k to rent it. 

The Turbo program said we had a $0 deduction. I presume that is because of our income over $150k.

It also said we could not deduct mortgage interest because we were "over the $10000 limit", whatever that is.

I saw no place for depreciation .

Should we just deduct the $14k expenses from the 2019 income?

Should we try to depreciate the property somehow?

Should we put the property into a LLC to avoid the $150k phase out limit on passive rental deductions?

[ntimken]

I don't think we meet the requirements for a Schedule C business. (I don't know what they are).

We bought the place in Oct 2018 as a vacation place to rent out till we retire in a few years. The place was empty. We spent $10,000 to furnish it and for supplies so someone could live in it as a rental. It cost us about $4000 to fly down there 3 times, rent a car and hotel room.   It was ready to live in and rent in Dec. 2018, but we didnt get a tenant till Jan 2019. (We could declare it not ready till 2019 as you said).  The tenant paid us about $8k to rent it. 

The Turbo program said we had a $0 deduction. I presume that is because of our income over $150k.

It also said we could not deduct mortgage interest because we were "over the $10000 limit", whatever that is.

I saw no place for depreciation .

Should we just deduct the $14k expenses from the 2019 income?

Should we try to depreciate the property somehow?

Should we put the property into a LLC to avoid the $150k phase out limit on passive rental deductions?

[Carl]

I don't think we meet the requirements for a Schedule C business. (I don't know what they are).

Then you need to find out what they are. I *HIGHLY* suggest you get with a CPA or tax pro in your local area for clarification on this. *IT* *MATTERS*!!!!

For SCH E Rental Real Estate start up expenses are flat out not allowed. Period. Not one penny.

But if you're doing "vacation rentals" on AirB&B that sounds more like a hotel operation, than a long term rental operation. Now that *would* be a SCH C business. Basically, one of the requirements is that you must provide your tenants a service that is directly beneficial to the tenant "on a recurring basis". For example, making the beds daily, offering a weekly linen service, offering laundry service, etc.  Understand that does not mean that you personally have to provide those recurring services. You could contract them out to a 3rd party if you want, or have AirB&B take care of doing that for you, if offered.

Additionally, you need to know some definitions as clarified by your state, county or city. One clarification needed is what constitutes a "short term rental". In my city a short term rental is defined as any property that is leased out for *less* than 30 days for any one period during the entire calendar year. So say I rent out a property for Jan-Feb to a tenant, then rent it out for 2 weeks only to the next tenant, and then rent it for the rest of the year to a third tenant. By my city's clarification my rental property is treated like a short term rental for the "entire" year. My city imposes a $3 per night - per person bed tax on all hotels, hostels and short term rentals. That would mean I would have to pay that bed tax for every single night my property was rented for the entire year, and that's $3 per person, per night.

So get with a tax professional in your local area to ensure you are following all the laws, rules, regulations and ordinances of your local jurisdiction.

The last thing you need at your retirement time, is a hefty amount of fines and penalties for not following some obscure law, regulation or ordinance. So please seek professional advice from a local pro in your area that is well versed in the laws and ordinances in your area.  My bet is, you do have a SCH C business where you can deduct your startup costs. But the last thing you want is to have those deductions cancelled out with fines, penalties and back taxes because you didn't collect and pay something like a simple bed tax.