How do I account for/report investment property expenses for a house we fixed up in 2019 but did not rent out until 2020?

[zjbeitz]

My husband and I bought a house in August 2019 to first fix up and then rent out as an investment property. We did repairs from August 2019-January 2020. We put a lot of money into the repairs/remodel and want to make sure we include the deductions we can. If I understand correctly, for 2019 we can only deduct mortgage interest and property taxes on a 1098 form -- is this correct? We posted the home for rent mid January 2020 and had tenants move in on February 1, 2020. Will we get to include our receipts for expenses in 2019 when we file our 2020 taxes next year? Thank you.

[Redsdad]

Did you ever get an answer to this? I did the same thing, house wise, but can only find "only if you had income from the property". Thanks!

[AnnetteB6]

Until the point in time that your property is advertised and made available to rent, you do not have a rental property.  As such, you cannot claim rental expenses, regardless of whether you have income yet.

Since you purchased the house and put money into the repairs and improvements before it actually is considered a rental property, all of those expenses will be added to the basis of the house and will be accounted for when you depreciate the house as a rental property.  You will not be able to directly deduct those expenses either on your 2019 return or on your 2020 return. 

After the house is placed in service as a rental property, then you can begin to deduct rental expenses such as utilities, repairs, etc.

For 2019, you can deduct the property tax paid and mortgage interest if this is a second home for you.  These items would be deducted on Schedule A, not Schedule E since the property was not placed into service as a rental until 2020.  You will only include Schedule E Rental Income and Expenses starting with your 2020 tax return since that is when the property was placed in service as a rental.

@zjbeitz

@Redsdad

[Carl]

Basically, you have absolutely nothing to report concerning this property on SCH E on your 2019 tax return at all. Not a single penny.

However, if you paid mortgage insurance and property taxes on the property in 2019, you can claim that. For 2019 the property is treated as a 2nd home. So you'll claim your property taxes and mortgage interest paid on SCH A.

You'll report it under the Deductions & Credits tab in the "your home" section, which is the same exact place you enter this stuff for your primary residence you actually live in.

You will not deal with the newly acquired property "as" rental property until you complete your 2020 tax return next year. Under no circumstances and with no exceptions will you enter anything on a 2019 tax return SCH E concerning the newly acquired property.

The below information will apply to you when you complete your 2020 taxes next year. You don't need it at all for your 2019 tax return.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
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 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 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.

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 3^rd 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.

[zjbeitz]

Just got a response after you left your question! However we ended up filing our taxes through an accountant because I was too unsure on how to do them myself with this rental property. After looking over their work, it's very simple. Expenses from 2019 will not go on 2019's tax return except for property tax and mortgage interest. The property acts as your 2nd home for 2019 as it was not ready to be rented. Since we don't itemize, we didn't actually include the taxes or interest for this property, but you can if it's the best option for you. The accountant added up all of our improvement expenses for the home in 2019 and added them to the value of our property to come up with the deprecation. Closing costs for the property go towards amortization. They simply just calculated the depreciation and amortization for next years purposes so that we could get an idea of our future deductions. You would not actually need to compute these until next years filing. If you have additional expenses in 2020 for improving the property prior to renting it, they will be included with 2019's improvement expenses and increase your overall depreciated amount. Once ready to rent the property, expenses can then be deducted as regular annual repair expenses. Hope that helps!