Investors & landlords

Question: First you mentioned that when I add the property for depreciation it is the selling price of $127500 PLUS the Property Improvements. Then later when you were explaining the definitions of RENTAL PROPERTY ASSETS/ MAINTENANCE/CLEANING/REPAIRS you stated that Property Improvements can be done any time after the initial purchase (which was in 2012) and that it doesn't matter if it was my residence or not. I just wanted to verify that the Property Improvements made BEFORE it became a rental are added to the $127500 correct? 

• Answer:  Yes, this is correct.

Question: And anything done AFTER it became a rental is put in as an asset for depreciation the year that it was done (such as 2020)?

• Answer: Yes, this is correct.

Question: .Also, for anything that was done (Property Improvements) WHILE it was being PREPARED to become a rental, can that be added to the $127500 since technically it was still personal use? 

• Answer: Yes, this is correct.

Question: There were several large repairs that needed done and of course maintenance of the yard and landscaping, termite contract, taxes, interest, etc.  (while it was available for rent). Without even putting in the value of my home yet to claim the depreciation, TurboTax has increased my refund over $2K. I imagine it will be even more after I enter the home asset for depreciation. First of all, is that correct since I had no passive income from it that it has increased my refund (I read somewhere you can't take deductions if you don't have any passive income)?

• Answer:  First all expenses can be deducted beginning on the date it became available for rent.  Next, the rental activity is considered passive but with a special 'active participation' rule for residential rental properties that allows a loss to offset other non-passive income.  However there is an income limit that will come into play and will likely create a passive activity loss (PAL) carryforward to 2021 due to your income level.

  • Active participation is a requirement to be allowed to reduce other income by the loss on your rental property.  There is also an income limit that begins to reduce that amount.

  • Phaseout Rule: The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that’s more than $100,000 ($50,000 if you’re married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you’re married filing separately), you generally can’t use the special allowance. This is because the special allowance is reduced to $0 since the modified adjusted gross income is over the $100,000 amount.

Question: Secondly, with our incomes as it is, will it hurt us down the road that much if I do sell the property (as you mentioned it may be depending on our income but now I have provided that to you. Plus I imagine our income will be less when we retire)?

• Answer: At the point of sale, under current tax law (no known changes currently), the gain on the sale to the point of depreciation recapture would be taxed at a maximum of 25% (known as Section 1250 property) if you are in a tax bracket that is higher than that. If you are in a lower tax bracket (such as when you are retired) then the tax rate will be less as well.  Keep in mind that you will use the recovery period of 27.5 years meaning the property must be depreciated over that time period. It uses a mid-month convention meaning you get a half month the month placed in service and the month removed from service with a full month for each month in between. In 2020 TurboTax will calculate 8.5 months for 2020 based on your April starting month.

The following is some added detail about rental activities that will come up as you enter your rental information.

1. Any PALs unallowed will be carried forward until the property is sold at which time you can use them all up.
2. Qualified business income deduction (QBID) - Can I get the QBID for rental income? (Not likely-review the 'Safe Harbor' requirements).

   • To change the answer or review your selections you can use the steps below.

   1. Open your TurboTax return > Search (upper right) type rentals > Press enter > Click the Jump to ... link
   2. Edit next to your rental activity > Scroll to Qualified Business Income > Edit/Update >
   3. Select 'None of the above' on the Real Estate Professional page
   4. Continue to the page Do you want to use a safe harbor.... Select your answer' > Continue
   5. Select 'Yes' or 'No', on the page  Is this Qualified Business Income?
      • OR
   6. Open your TurboTax return > Search (upper right) type Qualified business income deduction  > Press enter > Click the Jump to ... link
   7.  Arrive at the QBID section to answer the questions shown above