Can I expense/depreciate the appliances I bought in 2021 for my 2022 rental tax deduction?

[wleuter]

Let's say I bought new appliances in 2021 and began to rent my house part of a year in 2022, can I still  expense/depreciate the appliances for my 2022 rental tax deduction?

Thanks!

[Opus 17]

No. When you first place the home in service as a rental, you get one line of depreciation for the home as-is, with whatever it contains.  If you later replace appliances, they are individually depreciated (or probably expensed, if they are less than $2500).

[Anonymous_]

Can I expense/depreciate the appliances I bought in 2021 for my 2022 rental tax deduction?

You could use cost segregation (analysis) for the appliances (in order to depreciate them as 5-year property), but it's probably not worth it in this instance.

See https://www.irs.gov/pub/irs-pdf/p5653.pdf

[wleuter]

@Opus 17 

Thanks for your answer.

Let's say I also bought new appliances in 2022 after my rental is over at the end of July, 2022, then I rented my house again from Jan, 2023.

Can I depreciate these new appliances for 2022's tax return (But I bought them after the rental was over) or 2023's tax return (But I bought them in 2022)?

[Opus 17]

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@wleuter wrote:

@Opus 17 

Thanks for your answer.

Let's say I also bought new appliances in 2022 after my rental is over at the end of July, 2022, then I rented my house again from Jan, 2023.

Can I depreciate these new appliances for 2022's tax return (But I bought them after the rental was over) or 2023's tax return (But I bought them in 2022)?

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So, we need to make a distinction, as @Anonymous_ indicated before, on whether this is a long term rental or a vacation rental.  Consider three hypotheticals.

A. You planned to rent out long term.  Your first tenant left after 6 months, and you had second thoughts, so you moved back into the home for personal use, and made some improvements and upgrades for personal use.  Then you thought your options over again, and decided to try making the home a long term rental again.  You have a tenant with a year lease and you plan to continue indefinitely.

B. You plan to rent the home for 6 months or so every year, taking the home back for personal use in between.  It might be a vacation home, or an AirBnB situation, or something similar, but it isn't intended to be a long term rental to the same tenant.

C. You planned to rent out long term.  Your first tenant left after 6 months, so you took the opportunity while the home was vacant to make some improvements to make it a better rental property.  Although you might have lived there temporarily while making the improvements, you kept your main home someplace else.  The home was always a "rental" from the first tenant, even though it was temporarily unavailable to rent due to improvements.

The timing and treatment of improvements, deprecation, and so on will follow different rules depending on which scenario is closest to what you are doing. 

[wleuter]

@Opus 17 

Thanks for your answer!

We don't plan for long term rental because it is our residence. We rented it out in part of 2022 and part of 2023 to different renters because we happened to travel somewhere else at the times. We might rent it again for part of year in the future if we travel again but can not decide now.

Is our situation close to B or not?

[Opus 17]

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@wleuter wrote:

@Opus 17 

Thanks for your answer!

We don't plan for long term rental because it is our residence. We rented it out in part of 2022 and part of 2023 to different renters because we happened to travel somewhere else at the times. We might rent it again for part of year in the future if we travel again but can not decide now.

Is our situation close to B or not?

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Yes, you have a vacation rental.  We probably need to go back and revisit all your previous questions and answers.  For example, the answer about taking the property out of service, and restarting depreciation when you put the property back into service, doesn't apply, your situation is different.

I don't know the different rules for vacation rentals.  @Anonymous_  or @Carl might have insight.  To start with, you can review the IRS web site here. 

https://www.irs.gov/taxtopics/tc415

[Anonymous_]

Section 280A is applicable since the house is rented but used for personal purposes for a number of days that exceeds the greater of 14 days or 10% of the number of days during the year for which the house is rented.

Section 280A(d): https://www.law.cornell.edu/uscode/text/26/280A

As a result, expenses need to be allocated and, generally, expenses will not be allowed to exceed income.

[Carl]

Short term/vacation rental situations are covered in more detail in IRS Publication 527 starting on page 17. https://www.irs.gov/pub/irs-pdf/p527.pdf  It's important to read any other references that may be linked in that document too.

[Anonymous_]

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@wleuter wrote:

......We might rent it again for part of year in the future if we travel again but can not decide now....

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I just re-read this part of your post, @wleuter. If you are uncertain with respect to your future plans, you might want to treat this scenario as not rented for profit rather than some sort of regular rental activity or vacation rental.

See https://www.irs.gov/publications/p527#en_US_2022_publink1000219164

Since this appears to be your principal residence, you do not want to have to deal with depreciation recapture (unrecaptured Section 1250 gain) when you ultimately sell your house (for which you would typically qualify for an exclusion from gain per Section 121). 

[wleuter]

@Anonymous_ 

Thanks for your suggestion! It is really helpful.

I have one more question. If I treat my rental as "not rented for profit ", I can not use Schedule E, right?

So can I report my expenses (also mortgage interest, qualified mortgage insurance premiums, real estate taxes) with standard deduction? Or Can I only choose itemized deduction in order to report those expenses?

Thank you!

[Anonymous_]

@wleuter 

That is correct; you do not use Schedule E; you report the income as Other income on Schedule 1.

Report mortgage interest and real estate taxes on Schedule A if you itemize (otherwise you simply use the standard deduction).

[wleuter]

@Anonymous_ 

Thank you again for your answer!

I still have one more question. If I report my not-for-profit rental income on Schedule 1, are the time for renting still treated as "nonqualified use" when I sell the house in the future?

[Anonymous_]

It's a fairly simple test (for your purposes) since the non-qualified use is any period during which the property is not being used as your principal residence. However, temporary absences are generally allowed (not counted).