How do I enter my startup expenses for my rental property?

[MargaretL · Accepted solution]

All your expenses (except property taxes and mortgage interest if you have one) paid BEFORE the property was listed as available for rent are simply added to the cost of your rental property (in your records). No additional entry TurboTax is rquired.  This includes your "closing" expenses, such as appraisal costs, fire insurance, as well as your repair costs. The total amount is called adjusted basis (not just the cost, but the cost plus all your pre-rental expenses).

Once the property is available for rent, you may start depreciating the rental property and use the "adjusted basis" in the Sale of Property/Depreciation section. You can deduct your property taxes and mortgage interest, in the Deductions & Credits section, for pre-rental time frame. Once the rental is available, they are your rental expenses.

If your start up expenses are paid while the property is available for rent, but is not rented, they are your regular expenses, entered in the Expenses section.

1. Federal Taxes
2. Wages & Income
3. Rental Properties and Royalties - follow the instructions  Where do I enter income and expenses from a rental property? - once you go through some general information, you'll arrive at Rental summary screen. Please select Expenses or Sale of Property/Depreciation and enter your property.

For more information, please see link below:

https://ttlc.intuit.com/questions/2569433-what-kinds-of-rental-property-expenses-can-i-deduct 

https://www.irs.gov/taxtopics/tc414.html 

[trapezewdc]

Quick question. I bought a property and did a bunch of improvements to it in 2017 and didn't start rental activities until 2018. For 2018 tax return, can I still add those improvements done in 2017 to my purchase cost to increase my cost basis so that I can take a higher depreciation in 2018 tax return ?

While I am not sure if it matters, the property I bought is a condo with 2 master suites that share living room, dining, and kitchen while each master suite has its own bath inside it. I occupy one suite and a renter occupies the other. Thanks.

[jsand1]

Thanks for the information.  If property taxes and mortgage interest prior to being rentable are expense and not added to the basis, and entered as you say to TT under Deductions and Credits, do they get caught up in the Itemized Deductions / Standard Deduction issue?  And if so, and the Standard Deduction is larger, does that mean the rental property taxes and interest are lost?

[Carl]

I am in disagreement with @MargaretL 

When it comes to long term residential rental real estate, any and all expenses incurred before the property was "available for rent" are just flat out not deductible at all. (do not confuse this with property improvements.)  This especially includes those expenses incurred in preparing the property for rent, for that *very* *first* *time* and does not include expenses incurred during vacant periods between renters.

IRS Publication 527 has no allowance for expenses incurred before the property was available for rent. So for rental property there is no such thing as start-up expenses.

Now property improvements are a different story. A property improvement adds "real" value to the property, and it doesn't matter when that property improvement was done either. Property improvements done before the property was placed in service are entered in the Assets/Depreciation section and will have the same "in service" date as the property itself.

Property improvements completed after the property was converted to a rental are also entered in the assets/depreciation section. However, their in service date will be some date "after" the property was originally placed in service.

Long term residential rental real estate income is reported on SCH E with no exceptions. Yes, I said *NO* exceptions.

[nayborbob]

Carl

Sorry for the Q on such an old thread, but engineers like to know how stuff works...

Why can a business capitalize startup expenses (Pub 535, pg 4) and get tax relief for those costs, but residential rental property owners cannot?

If I was an active participant and could show 250 hrs of active management in a year would that change the situation do you know?

Thanks

Bob

[AmyC]

1. Start-up expenses for a business are to create and investigate the business . See here. A rental property requires no investigation or research and would not qualify for start up expenses as defined by the IRS.

2. An active participant would change the amount of loss allowed from the $25,000 cap for passive participants but would not change the law regarding start up costs.

@nayborbob 

[daston4]

If a residential property bought in 2024 takes 6 months to get ready to rent, are the utility, insurance, and real estate taxes considered start up costs?  if not, how are they recorded for tax purposes?

[DianeW777]

Yes, those expenses could be considered start up expenses until your rental property is available for rent whether or not you have an immediate tenant. You can either deduct or amortize start-up expenses once your business begins rather than filing business taxes with no income.

Start up costs - if you had any expenses before you actually opened for business services such as legal fees, market study or organization fees.  

1. Amortize all of them over 180 months (IRC Section 195 Property); OR
2. ​​​​​​The IRS allows you to deduct $5,000 in business startup costs and $5,000 in organizational costs, the first year the business/rental is operating, but only if your total startup costs are $50,000 or less
   • Add them as Business Expenses. Continue past the expense categories (or choose Other Miscellaneous Expenses) to the page titled "Enter Business Expenses Not Yet Reported" and enter the description & amount 
     • If you have more than $5000 in start-up costs, the remainder is entered under Assets/Depreciation as a capital asset for amortization as noted above.
     • Start up Business Tax Tips

Any assets purchased (house, appliances, capital improvements) will  be added as Assets for your rental property. Under rental expenses select Add expenses or assets.

• Where do I enter income and expenses from a rental property?