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SpinoneItal
New Member

I bought an investment property last year but am still improving it. How do I recoup expenses from last year.

 
3 Replies
RobertG
Expert Alumni

I bought an investment property last year but am still improving it. How do I recoup expenses from last year.

Improvements to an investment property are not depreciated or deducted until the property is either placed in service as a business or rental, or sold.

 

The improvements increase your basis in the property and would reduce your gain when the property is sold. 

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stevec328
Level 1

I bought an investment property last year but am still improving it. How do I recoup expenses from last year.

So, are you saying that if I bought a distressed property in May 2020, and it took 10 months to rehab the property and it not put into service for a rental until April 2021, I cannot deduct rehab expenses until 2021 taxes?  

 

What about all the utility expenses and costs leading up to December 2020?

DianeW777
Employee Tax Expert

I bought an investment property last year but am still improving it. How do I recoup expenses from last year.

Yes, that is correct. Until the property is available for rent you do not have any deduction on your tax return.  

 

Capital improvements become part of the cost basis of the investment property and the combined total will be the depreciable rental asset.  The land value must be separated out because it will always be an appreciable asset under the tax law.  For your reference you can use the property tax assessment records to determine the percentage of the cost that should be allocated to land.  TurboTax will ask you the land value when you begin your rental activity in 2021.

 

Utilities, Insurance, etc: Costs you incur before you are actually in business of a rental activity are called start-up expenses. Special tax rules govern the deduction of these costs. Any expense that would be deductible as an operating expense by an ongoing business is a start-up expense when it’s incurred before a business begins.

 

Start-up Expenses: You can deduct up to $5,000 in these expenses the first year your rental is available for rent. For the past several years this limit has been $5,000. You’ll have to deduct any additional start-up expenses in excess of the first year limit in equal amounts over the first 180 months (15 years) you’re in business. This is referred to as an amortization deduction and is similar to depreciation but somewhat different.  TurboTax will help you with this deduction. 

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