Landlord Deductions

[cbutton]

I have a business and I need a large amount of storage space for consignments and supplies.  I purchased a residential property in 2020.  The property has both an attached and detached garage.  I use the detached garage for storage of my business supplies.  I have not yet rented the home as we are doing a lot of repairs.  the person doing the repairs is living there now in exchange for rent.  I have spent $25,000+ in supplies for the repairs - only a small portion apply to the detached garage. 

What can I do for the best tax plan? Lease back the detached garage from the rental business to the consignment business setting up a separate schedule C for the rental business?

Is there any way to deduct the expenses on the home with no income?

[ColeenD3 · Accepted solution]

You, in effect, have two properties. One that acts as a storage for your business and one that acts as a rental property. You will need to split them and treat them as completely separate, dividing common expenses such as mortgage interest and property taxes. This will be depreciated on Schedule C.

The other is pure rental. You are receiving rent, just in the form of services. If, as described below, you are renting a Full Rental Value, you can take your expenses.

Property or services.

If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. 

If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.

Example.

Your tenant is a house painter. He offers to paint your rental property instead of paying 2 months rent. You accept his offer.

Include in your rental income the amount the tenant would have paid for 2 months rent. You can deduct that same amount as a rental expense for painting your property.

Pub 527

[cbutton]

Thanks so much Coleen.  That makes a lot of sense. One quick follow up question.  How do I handle depreciation?  The cost basis for the detached garage is not split out on my property taxes and I have no idea when it was put in service or the cost.  The square footage of the garage is 25.3% of the total building square footage including all unfinished areas (ie detached garage + attached garage + home living space).  Can I simply split all my closing document info across what you are saying in essence is 2 separate properties by the area%? So if I paid $200,000 Can I say the detached garage is worth $50,600?

[ColeenD3 · Accepted solution]

Yes to everything you said. You can use that percentage for all your expenses as well.

[cbutton]

Thanks again.  Your responses have been timely and very helpful!  A real benefit to Turbotax users.

[moe-shahram]

I am a handyman and do the repairs on my rental property myself, how do I deduct the cost of repairs, including material and labor?

Thanks

[cbutton]

Deducting materials is no issue but I do not believe you can deduct your own labor

[AmyC]

Correct, you can NOT deduct your own labor expenses. 2020 Instructions for Schedule E - Internal Revenue Service states on page 6: Do not deduct the value of your own labor or amounts paid for capital investments or capital improvements.

@moe-shahram