Deductions on carriage house thats not in service

[val31178]

We purchased a home last year, it's a multi-family. We live in the main house, it also has a 2 unit carriage house on it that was occupied by 2 tenants when we took ownership. It needed extensive repairs and updates to get up to city code. We did not renew the lease with the tenants and it has been vacant for around 10 months now. We have been getting quotes on doing the repairs. Our accountant has said that we cant deduct those expenses as the property is not in service and not occupiable. Other research shows that it can be. Just looking for clarification on this.

[tagteam]

With respect to improvements to the property, the cost of those improvements cannot be deducted (capitalized) if the property is not "ready and available" for rent.

The property cannot be "ready" for rent if it is considered not fit for occupancy according to the county code.

[val31178]

What about this other post https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/yes-you-would-have-to...

Can all the repairs be lumped together and depreciated over the next 27.5 years as explained in the last post in the above link?

[Critter-3 · Accepted solution]

Yes ... all the improvements can be placed into service when you put the rental back on the market as depreciable assets.   Read up on the rules on being a landlord here :  https://www.irs.gov/pub/irs-pdf/p527.pdf

[tagteam · Accepted solution]

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@val31178 wrote:

Can all the repairs be lumped together and depreciated over the next 27.5 years.....

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Yes, as @Critter-3 explained, all improvements can be depreciated over 27.5 years beginning at such time as the property is placed into service.

You do need to distinguish between repairs and improvements, however.

See https://www.irs.gov/publications/p527#en_US_2020_publink1000219015

[Carl]

Can all the repairs be lumped together and depreciated

Yes ... all the improvements can be placed into service when you put the rental back on the market as depreciable assets.

You are asking about repairs. But the response applies to property improvements. While the response may not be wrong in your particular case, understand that there is a difference.

Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.

Repairs are those expenses incurred to return the property or it's assets to the same usable condition they were in, prior to the event that caused the property or asset to be unusable.

Repair expenses are deducted, and can only be deducted/claimed as an expense if the cost is incurred while the property is classified as a rental.

Property improvements are capitalized and depreciated over time. Improvements are listed/entered in the assets/depreciation section of the program.

If after the last tenant moved out, you did not use the property for any personal use for even one single day, and your intention is to rent the property out again after the work is done, then the property can remain classified as a rental. That means repairs are deductible on SCH E.  Improvements will still be entered into the assets/depreciation section with an "in service" date starting the date you begin actively trying to rent it out again.

So if your improvements are completed in 2021 but you don't start actively trying to rent it out until 2022, then you will *not* enter your property improvements on your 2021 tax return. Instead you will enter them on your 2022 tax return.

Any repair expenses that are actually incurred in 2021, most certainly can be claimed on the SCH E of your 2021 tax return, assuming the property remains classified as a rental for the remainder of 2021, and will retain that classification into 2022.