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wings_ot
New Member

Can I deduct improvements made to a rental home in 2020 if I was living in the home until it was ready to be listed for rental in 2021?

I bought the home in 2020 with intent of turning it into a rental after doing some much needed repairs and renovations. I have been living in the home since closing but it will be ready for rental in March of 2021. Home was purchased below market value and bring it back to fair market value.
8 Replies
Carl
Level 15

Can I deduct improvements made to a rental home in 2020 if I was living in the home until it was ready to be listed for rental in 2021?

I am assuming this is your first time dealing with rental property and the landlord experience. So please excuse me for the "language" if that assumption is wrong. Below I've posted information that you will "need". It also defines how you are required to treat property improvements, (sometimes referred to as capital improvements) and show the difference between improvements and repairs. (improvements are capitalized/depreciated, while repairs are treated differently depending on when that repair was done.)

 

You also mentioned that you "lived in the property" after closing. Understand that since at no time in 2020 was the property classified for any type of business use, your acquisition of the property on your 2020 tax return will be reported as the acquisition of a 2nd home. (assuming you already own your primary residence, that is.) The only things you will be allowed to deduct on your 2020 tax return will be property taxes and mortgage interest. They get claimed as an itemized expense on SCH A. Period. That's it.

Since the property was not "available for rent" at any time in 2020, you will not be reporting anything concerning this property on SCH E as a part of your 2020 tax return.  However, when you complete your 2021 tax return next year all those capital improvements (along with other acquisition costs you can not claim on your 2020 tax return) will be dealt with then. So KEEP ALL YOUR RECEIPTS AND SUPPORTING DOCUMENTS not only for the purchase/acquisition, but for the capital improvements you paid for also.

 

Rental Property Dates & Numbers That Matter.


Date of Conversion - If this was your primary residence or 2nd 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 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 or 2nd home, 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 “better” the property. Basically, they retain or add value to the property. Expenses for this 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 must 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, 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 3rd 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.

IHateTaxIRS
Returning Member

Can I deduct improvements made to a rental home in 2020 if I was living in the home until it was ready to be listed for rental in 2021?

@Carl I have a follow-up/related question. I made material improvements to my primary residence (finished my basement myself) to make more attractive as an Aribnb. How do I enter the improvement costs for depreciation into TurboTax Premier? Since I did the work myself, do I need to list line by line the items I purchased towards the project (extremely tedious)? Or can I simply add in a total cost somewhere? If so, how should this be entered?

 

Also, the house has been assessed with increased value. Do I enter this higher value somewhere (separately from the improvement itself) to account for depreciation?

 

Thanks in advance for any helpful input.

Carl
Level 15

Can I deduct improvements made to a rental home in 2020 if I was living in the home until it was ready to be listed for rental in 2021?

Your property improvements are entered in the assets/depreciation section. It works like this.

-The first thing listed in the assets/depreciation section is the entire property itself. Since your entire property is not for business use, you'll indicate that percentage of your floor space that "is" business use. The program will figure accordingly. (There is a caveat here, I'll cover later in a 2nd post in this thread.)

-For your property improvements, if those improvements you did are for the "EXCLUSIVE" use of the renter, and there will be NO personal use of the area while it's classified as a rental, then the business use percentage of those property improvements will be 100%.

-For those property improvements that are for the shared use of you and the renter, then list those improvements separate from those that are exclusive to the renter, and the appropriate percentage of business use. (I suspect you won't have any shared improvements, but mention it to cover all the bases.)

 

Carl
Level 15

Can I deduct improvements made to a rental home in 2020 if I was living in the home until it was ready to be listed for rental in 2021?

Here's a few definitions and clarifications. I'm not wording it exactly like the program does. But you'll see as you work things through, where this clarity is needed and comes into play.

Percentage of your floor space that is exclusive to the renter - This will be less than 100%.

Percentage of time the space was used for business/rental purposes - This is asking that, of the floor space that is exclusive to the renter (less than 100%), what percentage of the time was it used for business DURING THE TIME IT WAS CLASSIFIED AS A RENTAL. This will be ONE HUNDRED PERCENT, provided you did not utilize that space for any personal purposes for one single day DURING THE TIME IT WAS CLASSIFIED AS A RENTAL.

The time before it was converted to rental DOES NOT COUNT for anything. The time after you converted it back to personal use (if you do that) DOES NOT COUNT for anything.

 

Carl
Level 15

Can I deduct improvements made to a rental home in 2020 if I was living in the home until it was ready to be listed for rental in 2021?

Please read through this entire post first, before you actually do anything.

When converting a part of your primary residence to rental, during the initial entry of your property in the assets/depreciation section, there is one screen that has a question on it with one word in it that changes everything for *your* *specific* and *explicit* situation. You must change that word (in your mind) so that you answer the question correctly. Failure to do this will result in an INCORRECT amount of depreciation being claimed in the year you convert a portion of your primary residence from personal use, to rental property.

Let's work it through.

As you begin entering the property you'll come to a screen, "Do Any of These Situations Apply To This Property?"

- Select 2020 is the first year, then select I rent out part of my home, then select I converted this property from personal use to a rental in 2020. Then continue.

- Read the information on this screen, then continue.

- Select NO, the property was not rented all year. For days rented, the day count starts on the first day a renter "COULD" have moved in. For personal use days enter ***ZERO***. (read the note under that box.) Then continue.

- Select NO, I do not have a home office, and continue. (A home office is not allowed for residential rental property, only for commercial rental property.)

- Select YES, I will enter total amounts and let TurboTax do the math. Then enter the percentage of your total floor space that is exclusive to the renter. Remember this percentage number. You will need it again later. Then continue.

- Select YES, I am active participant, and continue.

- Select NO for the 1099-NEC question about paying more that $600 to any one person, and continue.

- Select to enter rental info myself, and continue.

- Assuming your property is not in a designated area, select None, and continue.

- You're now on the summary screen. Enter the appropriate sections and go ahead and enter your rental income, then your rental expenses. ReAd ThE sMaLl PrInT on each screen, as it *will* apply and save you grief later.

- Now enter the assets/depreciation section and if prompted (you probably will be) answer YES, because you DO have assets that can be depreciated. Then continue.

- For the "$2,500 or less" question, answer no, and continue. (I don't know anyone who can build out a basement for less than $2,500, even if they do the work themselves.)

- Do the "Did you make improvements in 2020?" answer this question NO. Yes, I know you made improvements. But there is a reason you are selecting NO here. YOu will enter your improvements as physically separate assets. If you include the cost of your improvements with this initial entry for your entire property, then your cost basis structure value to land value will be WAY OFF. So answer this question NO, and continue.

- Select rental real estate property, and continue.

- Select residential rental real estate, and continue.

- Enter a description for the property. Something like "Basement Apartment" or whatever you like.

 - Enter what you paid in total for your entire residence in the COST box.

 - For the COST OF LAND box, enter that portion of the amount in the COST box, that was paid for the land. The program will subtract the COST OF LAND from COST, to determine what you paid for the structure on that land. It does this in the background without bothering you at this point.

 - Enter the date you originally purchased the property. Doesn't matter if it was years ago either. Then continue.

Now here's where attention to detail is important. Things can get screwy if you don't pay attention to detail.

- Select purchased new.

- Select "No, I have not always used this item 100% of the time for **THIS** business"

- Select "I used this item for personal purposes before I started using it in **THIS** business"

- Enter the date you started using it in this business. Typically, this will be the first day a renter "could" have moved in, and I am assuming that you did not use that space for personal purposes for one single day after the date you enter.

- Now, the next thing is "Percenage of *TIME* I used this item for this business in 2020". This is the "trick" question. For *your* *specific* *situation* you will NO enter percentage of time. Instead you will enter percenage of "FLOOR SPACE" of your residence that is used in this business. If you recall, you were asked for that earlier and I told you to remember that percentage, because you would need it later. Well... later is "now". 🙂 So enter the percentage of floor space, then continue.

You can review the details on the summary screen, then continue. This puts you back to the "Your Property Assets" screen. At the bottom of that screen you can click the "Add Another Asset" button to enter the property improvements you did. I am expecting those improvements you did to the basement were done exclusively for the renter. Therefore, business use percentage will be 100%. Also, the improvements are classified as "Residental Rental Real Estate" with the cost of the improvements done to the structure entered in the COST box. Your COST OF LAND box value will be ZERO since you did your improvements to the structure itself, and not to the land outside of the structure.

Take note that the value of your labor is "NOT" allowed to be included in your costs for anything.

Finally, if you need assistance with determining how much of what you paid for your residence when you originally purchased it, gets allocated to the land, I can help with that if you need it. But basically, you use your latest property tax bill to find the percentage figure to be used. Under no circumstances will you ever use the values on your property tax bill as actual values anywhere on your tax return.

 

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IHateTaxIRS
Returning Member

Can I deduct improvements made to a rental home in 2020 if I was living in the home until it was ready to be listed for rental in 2021?

Thank you very much for the detailed response! This was what I was hoping for, but much better help than I expected!

Thomas Hoffman1
New Member

Can I deduct improvements made to a rental home in 2020 if I was living in the home until it was ready to be listed for rental in 2021?

I have a 2 story flat in Erie, Pa.  I rent out the second floor for $315.00 per mo. and I live on the first floor for419

 

1.     I repaired the roof for $195.00.  Do I enter 1/2 and where does it go on my form?

2.     Had the refrigerator repaired for $200.00 this is in the second floor

3.     Painted the kitchen in apt. $250.00

4.     Repaired the bathroom sink and drain $645.00

5.     City rental inspection $40.00

6.     Had miscellaneous repairs of $741.00 

Carl
Level 15

Can I deduct improvements made to a rental home in 2020 if I was living in the home until it was ready to be listed for rental in 2021?

1. I repaired the roof for $195.00. Do I enter 1/2 and where does it go on my form?

1/2 of that is a rental repair expense without question at that price.  Entered in the rental expenses section called "Repairs"

2. Had the refrigerator repaired for $200.00 this is in the second floor

Another repair expense.

3. Painted the kitchen in apt. $250.00

Maintenance expense. Entered in the Rental Expenses section called "Cleaning and Maintenance"

4. Repaired the bathroom sink and drain $645.00

Another repair expense.

5. City rental inspection $40.00

This gets entered in the rental expenses section as a Miscellaneous expense so you can label it "county inspection fee" or whatever.

6. Had miscellaneous repairs of $741.00

Another repair expense.

Your cleaning an maintenance expenses (mainly the painting) will end up on line 7 of the SCH E.

Your repair expenses will end up on line 14 of the SCH E

Your inspection fee will end up on line 19 of the SCH E.

 

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