Can I reduce my adjusted basis in a rental by payment received from a renter for damages that was partial payment for upgrades but reported on a 1099-Misc form as Rents?

[duckref]

Total Cost of upgrades $55K, Total reported rents $21K ($3K rent and $18K damages)

[Carl]

No. All monies received for a rental property, regardless of the reason you were paid it, is included in the amount of rental income received for that tax year. Period.

Any repairs that money was used to pay for are then deductible as a repair/maintenance expense.

Any upgrades would be property improvement. The cost of a property improvement is never deductible. It gets capitalized and depreciated over time.

Now there are some things that in the past would "have" to have been classified as a property improvement, capitalized and depreciated over time. But due to recent tax law things some of those things may qualify for "safe harbor de-minimus" and can be deducted as an expense.

To save you time trying to decipher and an make sense of the convoluted IRS regs on this, let me know exactly what you fixed and/or upgraded. Then if you can expense those items that would normally be capitalized, and can let you know.

[Anonymous]

if $18K was for damages then did you spend $18K or more on repairs that were expensed?   if yes then the $18K in rent offsets the $18K in repairs which is proper.