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Startup cost deductions for a short term rental purchased in 2019 but not expected to rent until 2022
Hi All,
I have questions about the deductibility and classification of startup costs for a short-term rental that I bought in 2019 and has NOT yet been put into service as of 2021. Some initial details on the circumstances:
- I closed on the house (a mountain cabin) on Dec 30, 2019. I purchased it with the intent for it to become a full-time, short-term rental (this is still the intention).
- At the time of purchasing, I lived in another location (NYC) and came to the property on the weekends to make improvements, furnish it, and otherwise get it ready for rentals.
- In March 2020, I unexpectedly moved into the property full-time, a temporary diversion of my rental plan due to COVID.
- I began incurring expenses for the cabin as early as Oct 2019 (a few months before closing), and have continued to do so while living here through 2020 and up until now (Nov 2021). These expenses now total ~$57k and have ranged from new appliances, kitchen renovations, misc. repairs, a new deck, installing new landscaping/plants/hardscaping, spray foam insulation, new windows, paint, bathroom renovations, and furnishings/furniture (indoors and outdoors) which will ultimately be left for renters. I did some of the work myself, so I've also been tracking purchases of any additional tools I needed to complete some projects. I had also tracked my few trips up to the cabin for the few months before me purchasing the cabin and deciding to move in (mileage, hotel, gas), but I may exclude those until I have more clarity on whether they fall into the IRS rules for startup costs.
- NOT included in my startup expense tracking are the costs currently applicable to me as a primary resident (property tax, insurance, utilities, mortgage interest). I will eventually write those types of costs off starting with the period when the cabin begins renting.
- I have not yet placed this cabin into service as a business on my 2019/2020 tax returns since I am still living here. My tax deductions at the current moment are that of a primary residence (mortgage interest/taxes).
- I plan to (finally) move somewhere else and place this cabin for rent in Q1 2022, at which point it will be a year-round short-term vacation rental that I will no longer occupy.
My questions are:
- Given I place the cabin for rent in Q1 2022, am I right to wait until my 2022 tax return to "start" my short-term rental business and not identify anything on my taxes for it as a business until then?
- Are the $57k+ in expenses I've incurred from Oct 2019 through starting the business in Q1 2022 generally qualified as "start-up expenses" which can be (in one way or another) deducted or depreciated on my 2022 tax return? I understand the $50k start-up cost limit and phase-out of the $5k first-year expenses thereafter, but I'd like to know whether my total expenses can at least be considered in some way as business expenses, especially given they were incurred over multiple years.
- Does my living in the cabin while renovating for an extended period (see COVID) have any effect on my ability to qualify my expenses once I do rent it out? Yes, I'm technically using the furniture and home while I'm here, but all of the items being tracked as expenses were purchased to ultimately be part of the rental, and as such will stay here when I leave.
Thank you for reading this far - I appreciate any insight on this!
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‎November 23, 2021
6:32 PM