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D-48
Level 2

Depreciation Calculation for Property Ready and Available to Rent mid-December

We had never made our vacation condo available to rent last year until we decided to remodel it and then turn it into a rental property. The remodel occurred in the October/November time frame and we then made it available to rent on Dec 17. We actually rented it 5 days in the remaining part of December for $3400. We had no personal use August through December when we were preparing and recovering from the remodel.. How do we determine Depreciation since we did not begin to rent the property until mid month in December? Thanks.

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3 Replies
AnnetteB6
Employee Tax Expert

Depreciation Calculation for Property Ready and Available to Rent mid-December

As you go through the Schedule E Rental Income and Expenses section to get your rental property set up, TurboTax will calculate your depreciation deduction for 2023 based on the date that you converted the property to a rental.  

 

The date you converted the property is the date that you started advertising it and making it available to rent.  It is not necessarily the first day it was rented.  Be sure that when you enter information about the days rented and the personal use days that you do not include any personal use days.  This is referring to personal use days after the date it was converted to a rental property.

 

When you go through the section to enter information about the cost of the property, your purchase date, and other information needed to calculate the depreciation, be sure to include the remodeling costs as part of the basis of the property if it occurred prior to you making the property available for rent.

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Depreciation Calculation for Property Ready and Available to Rent mid-December

If you made it available for rent (on 12/17, that's the date to use for the in-serice date. 

Depreciation begins as soon as your property becomes income-generating or is put in service. For instance, if you bought the property on the 1st of June but only began renting it out on the 1st of August after necessary repairs, then you’d begin depreciation in August1.

In more technical terms, whether an asset is considered to be “placed in service” for depreciation purposes depends on its specific function and when it is in a condition or state of readiness and availability for that function. For example, if you acquire equipment for business production, it’s not enough to merely have it delivered to the warehouse. The equipment must be removed from the box and actually used for its intended purpose.

So, the in-service date for depreciation is determined by when the property is ready and available for its intended use, rather than the exact moment it is open for business or generating income.

Carl
Level 15

Depreciation Calculation for Property Ready and Available to Rent mid-December

. How do we determine Depreciation since we did not begin to rent the property until mid month in December?

"YOU" don't. The program does that for you, based on the "in service" date, using the mid-month convention. Typically, your in service date is the earliest date a renter "could" have moved in. Usually the day you put the "for rent" sign in the front yard.

Based on your post, the earliest date a renter could have moved in was Dec 17, 2023. So that's your "in service" date. The program (not you) will figure depreciation from Dec 15 - Dec 31 2023.
My impression is that you're a first time landlord. If so, take note that the program does not always "clearly" identify the information it is asking you to enter. Therefore I'm providing the below information to give you that clarity. Note that absolute perfection in that first year is not an option.... it's a must. Even the tiniest of mistakes can (and will) grow exponentially over time. Then when you catch that error years down the road (usually the tax year you sell the property) fixing the error can (and will) be costly. So if you have questions, please ask.

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 was contracted to move in, and/or "could" have moved in. That would be your "in service" date or after if you were asked for that. Vacant periods between renters do not count for actual days rented. Please see IRS Publication927 page 17 at https://www.irs.gov/pub/irs-pdf/p527.pdf#en_US_2020_publink1000219175 Read the “Example” in the third column.
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, 2nd home, or any other personal use reasons 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 Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property. Property improvements done "before" you converted the property to a rental should be added to the cost basis of the property, and not entered as a separate asset, unless the improvement is "NOT" classified as Residential Rental Real Estate. (For example, something that is classified as a land improvement.)

Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.

 

Expenses for these types of costs 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 need to 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 instead of capitalizing and depreciating them, 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 its assets in the usable 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 for the very first time are not deductible.

Repair

Those expenses incurred to return the property or its assets to the same usable 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 for the very first time 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.

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