I bought a house w/ intent to rent in 2016. The renovation is not done until April 2017 & i change to sell it instead. Can i report it as a rental property in 2016?

[Carl]

Nope. You never rented it in 2016, and since it was still under renovation at the end of 2016, you never had the property "available for rent" in 2016. Then in 2017 once renovations were completed, your *intent* changed from renting to flipping. You have to report it in the Investments section under the Personal Income tab. If on the closing date of your sale you've held the property for less than a year, you'll pay the higher short term capital gains tax on any profit you make on the sale too.

[tluu04]

Thanks Carl.  I was scratching my head when asked by Turbo Tax the date of availability for rent for this property.  It makes sense now.  In fact i sold it august 2017.  In this case, should i hold on reporting the purchase of this house in tax return 2016,  and report it (both purchase and selling) in tax return 2017 altogether?

[Opus 17]

There are no tax reporting requirements for purchasing the home in 2016 on your 2016 tax return.

There are some items you can probably deduct on both your 2016 and 2017 tax returns even though you can't list it as a rental.

•You can deduct mortgage interest on your main home and one second home. (As long as you don't own other personal homes, this can be your "second home" for the mortgage interest deduction.)

•You can deduct property taxes you pay on any property you own.

These are itemized deductions on schedule A.

You can't deduct repairs, insurance, or other expenses that might be allowed as rental expenses.

You would be required to report the sale and pay tax on your gain on your 2017 tax return.

You can include improvements as adjustments to your cost basis.  When you sell as investment property, you owe capital gains tax on the gain, which is the difference between the sales price (minus commission and any required legal fees and transfer taxes) and the adjusted cost basis.  Your adjusted cost basis is the price you paid, plus certain closing costs that were not deductible (they count as increasing the price you paid) plus the cost of permanent improvements.  So making improvements reduces your taxable gain so you do get a financial benefit.

The difference between a repair and an improvement is that a repair restores the property to as-was condition (patching a hole in the roof) while an improvement adds value or extends the useful life of the property (a new roof).  You include the costs you actually paid for materials and contractors, but you don't include the value of your own personal labor.

If you hold the property at least 366 days, it is taxed as a long term capital gain at 15% for most people.  If you hold for less than one year, the gain is taxed as ordinary income, which is 25% for most people.  (If your income is modest, the regular tax rate might be 15% and the long term gain rate 0%.)  So you may want to calculate whether you might save enough in taxes by holding it more than a year to offset the higher carrying costs.

[Carl]

Yes. Keep "BOTH" HUD-1 closing statements. (The one you got at the purchase closing, and the one you got at the sale closing). Since you held this property more than a year, I'm fairly certain you can report the gain on the sale as a long term gain, which is taxed at a lower rate.
Here's how to properly report it in the TurboTax program.
Under the Personal Income tab (or Wages & Income tab) scroll down to Investments and elect to start/update Stocks, Mutual Funds, Bonds, Other.
click YES
Click NO
Select "2nd Home" and click Continue and work it through.
WHen you get to the screen titled "Any Business or Rental Use?" you should select "Other Investment Purpose" ***ONLY*** if you sold this property at a loss. Then click Continue and follow the instructions. Otherwise, select "personal use" and press on.
For your cost information you need the following clarifications.

 - For the purpose of determining your taxable gain, your "cost basis" is what you paid for the property *plus* the cost of any property improvements. The program will ask for these values on the same screen in separate boxes.

What constitutes a "property improvement" in the eyes of the IRS?

• Property Improvement.

Property improvements are expenses you incur that add value to the property. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence, a 2nd home, 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.

.

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. (There's no value added when you paint a room, basically. Besides, you have no assurance the buyer will even like the color.)

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.