No, you will not use Schedule C for self employment for your residential rental activity. It will not be a self employment activity. This will be reported on Schedule E once it's placed in service. No expenses will be allowed until then.
Any expenses that are for capital improvements to the property itself will be added to the cost basis of the property when you 'place it in service' which is your critical date. You will begin with the actual cost or the fair market value whichever is less (usually cost when real estate is involved. when it's actually placed in service. Then add any capital improvements to that figure.
Once the property is placed in service, whether or not it is rented, all expenses and be utilized on your rental activity. 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 for the very first time are not deductible.
IRS Pub 527 Adjusted Basis: 'You must increase the basis of any property by the cost of all items properly added to a capital account. This includes the cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year.' This publication will be very useful for you.
Here is the key difference if you qualify as a Real Estate Professional:
Qualifying as a Real Estate Professional (REP) under IRS rules transforms rental activities from passive to active, providing significant tax advantages over standard active rental participation. The main benefits include unlimited deductions of rental losses against W-2/ordinary income, exemption from the 3.8% Net Investment Income Tax (NIIT), and enhanced use of accelerated depreciation
Rules you must meet to be considered a real estate professional are:
- more than one-half of the personal services you provided during the year were performed in a real property trade or business in which you materially participated, and
- the number of hours in which you materially participated in this real property trade or business was more than 750 hours, and
- you must materially participate in each rental real estate activity unless you filed an election to group all rental real estate activities as one and still met the material participation rules.
A 'real property trade or business' means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, or rental operation, management, leasing, or brokerage trade or business.
Personal services performed as an employee are not treated as being performed in a real property trade or business unless you are a more than 5% owner of the trade or business.
For joint return purposes, the eligibility requirements are considered met if either you or your spouse separately satisfy the requirements.
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