Deductions & credits

Carl · ‎May 31, 2019

>>What should I do about expenses and repairs I do to the property in the mean time? I have already had to put a roof on the house since her passing.<<

Repairs are not deductible "right now", because the property is not/was not a rental property. But it's important to understand the difference between expenses, and property improvements. Property improvements add to your cost basis. Since you will most likely be reporting this as a 2nd home on your 2016 return (which I recommend at this time), nothing you've paid for outside of property taxes and mortgage interest is deductible. However, you need to keep all records to prove your cost of property improvements. This is because when you sell the property, regardless of it's status when you sell it (be it 2nd home or rental) those improvement costs will reduce your taxable gain if you sell the property at a gain. Here's the clear cut definition of a property improvement.

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

>>The house is in need of much work.<<

I would suggest you go ahead and complete those things that would qualify as a property improvement, then in 2017 convert it to residential rental real estate and get it rented out ASAP. For those repairs that can wait until it's actively rented, let them wait and then you can deduct those expenses as rental expenses. There probably will be some repairs that you *have* to do, in order to get it rent ready. Those won't be deductible. But that's the way it is in the rental/landlord arena.

>>If I consider the home an investment property, how do I accommodate for these expenses?<<

Understand you can't "consider" something to be an investment. It doesn't work that way. You have to be able to "prove" that you acquired it with the "intent" to make money off it. Weather you actually make money or not is irrelevant. You have to prove "intent". Depending on your state, that can be difficult in the case of inherited property, unless you rent it out for a year or more.

But understand that if you do nothing and just turn around and sell it, most, but not all, of your repair expenses will qualify as deductible sales expenses.

??Are they used against the basis if I sell? <<

Again, it depends on the specific expense. Things like the new roof are property improvements and increase your cost basis. Something like getting the property treated for termites, or having a termite inspection performed would be a sales expense.

>>What happens to them if I decide to rent next year?<<

Quite a lot, and a lot of "what happens" can be more favorable on the financial and tax front for you in the long run. If I sound like I'm trying to talk you into being a landlord, that's because I am. You have a property with quite a bit of equity in it - equity that YOU did NOT pay for. (Your mom did). Rent it out, and basically the renter makes your mortgage payments, to include what's escrowed for property taxes and insurance. Your equity in the property continues to increase over time without you paying one penny out of your pocket, since the rental income would not only cover your payments, but would also over a relatively short period of time, reimburse you for those incurred expenses you could not deduct while getting the property "rent ready".

>>I was a co-signer on her mortgages which I am now paying.<<

Actually, I don't like that term "CO" signer. You were a "SIGNER" on the loan. You are now the primary borrower. Plain and simple.

>>She has a wonderful interest rate (due to a modification loan), but she is listed as the primary. Is this something I will need to address as far as a refinance? <<

Unless you can get an interest rate that is "AT LEAST" two full percentage points lower than what you have now, I would not bother refinancing. As a signer on the loan, I can't see any reason and am not aware of any law at any level of government that would require you to refinance the loan in your name. It's "ALREADY" in your name.

>>Thank you everyone for your help and thoughtfulness.<<

I've been a landlord with three rental properties for 22 years now, and love helping others get started in the endeavor. I learned my lessons the hard way, and if I can save you the hassles I went through and help you glide into the rental investments arena less painfully than I did, then that makes it all worth it to me. Just understand that in the process of starting your first rental, it takes more of your time, than it does your money. But things tend to settle down about 2-3 months after your first renter moves in, provided you screen your tenants well before signing a rental contract. I'd have to say that close to 90% of what I know about rentals and landlording is what *not* to do..... and I didn't learn it by not doing it!