Investors & landlords

I bought a home in 2012..... moved out at the end of March 2020 and I listed it for rent for April 2020. Because of COVID it was empty the entire year. I paid all the utilities, taxes, did repairs and maintenance on it during that time (it was still listed for rent). I know I can claim all of that stuff but I am confused when I enter the property for depreciation.

It's not that hard, though I can understand how for some the TTX program can take something that's really simple, and make it seem complex. This IRS doesn't make it any simpler either the way they write some of their rules. I refer to that as "complexified simplicity", or "going around your elbow to get to your thumb."

In 2012 I paid $127500 for the home. The land value was $30K. During the years I lived there, I added a fence, remodeled the bathroom, etc. I have all of the receipts. Do I add all those into the initial value?

Yes. So in the COST box you will enter $127,500 plus what you paid for all of those property improvements. But you will still enter $30,000 in the COST OF LAND box.

What about closing costs?

The program will take care of most of that for you normally. But apparently there are some scenarios where it doesn't. So for clarification in case you need it:

- Costs associated with your acquisition of the property get added to the cost basis of the property.  AN example of this would be the title transfer fees paid at the courthouse to take the seller's name off the title and put your name on it.

- Cost associated with acquisition of the loan are amortized (not capitalized) and deducted (not depreciated) over time. An example of this would be points paid at the closing, as well as survey cost if the lender required a survey as a condition of loan approval. However, for you I seriously doubt you will have any of these costs. Since this property was originally purchased as your primary residence and not for business use of any type, all costs associated with acquisition of the loan were fully deductible in the tax year you purchased the property and closed on the loan. So be careful here that you don't trying claiming these costs a 2nd time, as that would be double-dipping.

Also, where do I put in how long it was used for personal use (my daughter) in 2020 (Jan. Feb & March) and then April on listed for rent?

Nowhere. I can tell already that you are not fully understanding how this works, and you're also probably not paying attention to the small print on each screen. Below I provide you the clarification on things that in my personal opinion, the program does not.

Also, if you select the option that "I did not rent or attempt to rent this property in 2020" then you will be "FORCED" to delete the rental property entirely. So don't select that.

it said to enter 0 if it wasn't rented.

Your days of personal use will be ***ZERO*** (explained below).  Now in the past, if you put zero days rented that also would "force" you to delete the property from the tax return. But I've been told that has been fixed. However, if you enter ZERO days rented and it wants you to delete the property, then just enter 1 day rented. You'll be fine. The fact you are reporting ZERO for income is irrelevant. (You'll find a contradiction below. But the fact is, you did not have a renter in the property for even one single day in 2020. So you have no days actually rented for the entire tax year.)

Now overall, since the property was "in fact" not rented in 2020, I would recommend you not bother reporting it or converting it to a rental at all in 2020. In my experience, the little tax break you may get now, as the potential to come back and bite you later down the road. Since you are required to recapture all depreciation taken on the property in the tax year you sell or dispose of the property and pay tax on that recaptured depreciation, that could be "just enough" to bump you into the next higher tax bracket. Remember, recaptured depreciation increases your AGI. Bottom line is, it's your call.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2^nd home before, then this date is the day AFTER you moved out, or the date you decided to lease the property – whichever is later.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day for any type of personal pleasure use during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence, 2nd home, or any other personal use reasons after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.

Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.

Expenses for these types of costs 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 need to 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 retain or 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.

There are rules that allow you to just flat-out expense and deduct some property improvements instead of capitalizing and depreciating them, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3^rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.