Investors & landlords

We rented this house in 20 dec 2019, so it was not added as rental income last year, however conversion date was in 2019.

Technically and legally speaking, you should have reported the conversion on the 2019 tax return, and filed your first SCH E for that property with your 2019 return. But looking at how late in the year you got a renter in it, I honestly wouldn't bother amending the 2019 return at this point. I'd just start the SCH E with my 2020 tax return and show a conversion date and in service date of 1/1/2020.

So "technically" you should amend the 2019 tax return. But I'm not going to push you on it. One thing is, you'd have to amend the 2019 tax return before you could even start your 2020 tax return. That's the only way the "correct" data from the 2019 SCH E could be imported into the 2020 tax return. Remember, you can only import when you first start the return. You can't start your return and import later. So if you've already started your 2020 return and decide you're going to amend the 2019 return now, that would mean you'd have to start your 2020 tax return all over from scratch, to import the data from the amended 2019 tax return.

In my opinion, it's worth the risk of an audit to just leave the 2019 tax return alone.

Also we spent a lot in material improvement of the home ( With receipts) in 3 years before renting the house. Can we retroactively add those costs ?

It's not "retroactive" actually. But it is important to understand the difference between a property improvement and other types of "expenses". I've already provided those explanations and definitions in a prior post in this thread, so I won't beat a dead horse.

Your property improvements (defined in prior post) add to your cost basis in the property. Since the property improvements were done before you converted the property to a rental, you can just include those costs in your primary property entry in the Assets/Depreciation section. There's two ways to do it, and I"m going to explain both ways, and why you should "NOT" use one of those two ways.

Method 1: when you initially enter the property in the assets/depreciation section, one of the screens will ask you for the cost of any property improvements you did. DO NOT enter the cost of any property improvements here. Otherwise,the allocation of your cost basis for the property, between the land cost and the structure cost will just flat out be wrong. 

The program will ask you for information from your latest property tax bill. Now the property values on your property tax bill are "tax" values. Your property tax bill does not usually show the Fair Market Value (FMV) or the actual price you paid for any of it.It only shows the "assessed" value of the property for "property tax assessment only". However, the program does use those figures for the sole purpose of determining what percentage of the "actual" price you paid for the property, to allocate to the land.

So if your property tax appraiser has appraised your property to be worth $100,000 with $30,000 of that being the value of the land, that means that 30% of that is for the land, and 70% is for the structure on that land. Therefore, if you actually paid $250,000 for the property, then 30% of that ($70,000) is allocated to the land. The remianing $180,000 is allocated to the structure and that is the amount that gets depreciated over the next 27.5 years. starting from the date the property is placed "in service" as a rental.

So what's the problem with adding your property improvements where the program specifically and explicitely asks for the cost of any property improvements? Using my numbers above, if I added on a family room and an in-ground pool in the back yard at a cost of $100,000, that makes my cost basis in the property $350,000. The program will figure 30% of that for the land, which is "WRONG". When you do a property improvement that is 'NOT" a land improvement, that does not change the value of the land.

Method 2: On the screen where you have "COST" and "COST OF LAND", in the COST box you will enter the price you paid for the property when you originally purchased it. Then you enter the percentage of the COST in the COST OF LAND box that actually applies to the land.

next, you will change the amount in the COST box so that it includes the cost of the property improvements you did after your initial purchase of the property and "before" you placed the property in service as a rental. You will "NOT" change the amount in the COST OF LAND box, no matter what.

basically your answer implies we need to define the asses. But we did not think along these lines until now.

If the property improvements were done before you placed the property "in service" as a rental, then you can enter them separately if you want. But there's really no need to. You can just add those improvement costs to the cost of the structure that was improved, and you'll be good. The "bottom line" is going to be the same either way.

The only time you "have" to enter a property improvement separately, is when the "in service" date of that property improvement is different from the "in service" date of the main property asset itself. That's because depreciation does not start on an asset, until the date it is actually placed "in service".