Investors & landlords

@taxlady1971 

If the property was not rented for more than a year because of upgrades and repairs being done, it "sounds" to me like damn near all of the costs would qualify as a property improvement.

they have $43k in "supplies".

While I"m not doubting that as a possibility, I do question that as a reality. I don't spend anywhere near even 1/4 of that amount in one year on my own 4 bedroom 3 bath primary residence for "supplies". I get the impression that you are breaking down expenses into more detail than necessary. For example, in the process of replacing sheetrock on a wall that was water damaged by a burst pipe in that wall, I'm going to be purchasing new pipe, and new sheet rock, along with connectors for the new pipe, and nails for the sheet rock. The cost of all of that material is a property improvement expenditure with no doubt. But I"m also going to be purchasing paint for the new wall, masking tape to tape things off for mailing, maybe a drop cloth to put down so I don't get paint on the wood floors, along with rags, mops and other things I"m going to need in order to complete the work in it's entirety and clean up afterwards so I leave no evidence of my presence.

Now why the rags, mops, buckets, paint and other "supplies" I'm going to need could be classified as supplies, the fact is that cost was incurred as "a physical part of" the property improvement. Therefore the entire total cost of "everything" is the cost of the property improvement.

You can also include in that property improvement costs the cost of what's called "consumables". These are things that are "consumed" in the process of doing the property improvement. For example, things like electricity costs and water costs, up to a  "reasonable" amount.

For utilities, if the house was "NEVER" lived in during the upgrading/updating period by anyone as their second home, vacation home, or any other "personal pleasure" use, then the cost of water and electricity could be 100% deductible for the billing period of that utility in which the work was actually performed.

For a property that was "off the market" for more than a year with the primary reason for being off the market was to perform property improvements, I would recommend the house be converted to personal use one day after the last renter moved out. This will stop depreciation.

When the property is placed back on the market again and "in service", that's when you continue the depreciation. But with property out of service for more than a year, you have to do that a different way.

Basically, since the property was taken off the market in 2018 (I presume, since you mention the 2018 taxes were not filed yet) convert it to personal use one day after the last renter moved out. If they moved out prior to 2018 then convert it to personal use on Jan 1 of 2018 (unless that was already done in a prior tax year.) Then in 2020 when the property is back "in service" again, here's how you start the depreciation back up.

You enter the property as a "new" property, and you "MUST" subtract the total amount of prior depreciation on the property, from the original cost basis of the property that was used for depreciation in the past. You only lower the amount in the "COST" box, and you do not change the amount in the "Cost of Land" box. That reduces the cost basis of the structure only. Then depreciation starts all over for the next 27.5 years on the new, reduced cost basis.

You then enter your property improvements in the assets/depreciation section with the same "in service" date (or you can just add those costs to your "new" cost basis") and those too get depreciated over the next 27.5 years.

New appliances get depreciated over 5 years, so those would have to be entered separately. Just be aware that a new hot water heater is a "grey area" in the IRS pubs. The way I see it, is that a new hot water heater becomes a permanent part of the plumbing system, which makes that hot water heater "a physical part of" the structure. So it's classified as rental property and depreciated over 27.5 years. (As stupid as that is, that's how I interpret the IRS pubs.)

My main concern is that if you claim $43K of "supplies" for a single rental property, I see that the same as hanging out a sign that reads "HEY ! IRS! AUDIT ME NOW! PLEASE! HURRY! QUICK! FAST! I WANT TO PAY LOTS OF FINES, PENALTIES AND BACK TAXES!"  Especially for property that was not actually rented for more than a year, I would expect that to be a huge flag raiser with the IRS.

Keep in mind that unlike you and I, there are a fair number of people out there that truly believe depreciation is a permanent deduction. They just are not aware that when the sell the property they have to recapture that depreciation "AND" pay taxes on it in the year of sale. In many cases, that recapture is enough to put them in the next higher tax bracket. So this is why I myself try to keep my depreciation as low as legally possible. Even so, I would still show passive losses on paper at tax filing time that would get carried over. (Don't have carry overs anymore though, since I paid off one of my 3 rentals a few years back.)