Cost basis is what you paid for the house (or what your mom paid for it in your case) plus the cost of any property improvements incurred after the original purchase (by your mom in this case). It's important to know what qualifies as a property improvement.
Read *ALL* of the below so you can get on the same page as me.
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 POPERTY 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 classified
as cleaning/maintenance costs. They are instead classified as startup costs,
amortized as such and depreciated over time.
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 classified as startup costs, amortized as
such and depreciated over time.
Startup Costs
Please note that if
residential rental income is not your PRIMARY business, and your PRIMARY source
of income, then your rental business is considered to be passive, and you flat
out, no way, no how , are not allowed to deduct your startup costs. Period. The
IRS says so. See https://www.irs.gov/pub/irs-drop/rr-99-23.pdf and please take note that rental property
produces “passive” income, while other types of businesses produce “active”
income. Your rental property is not classified as your “active” business,
unless you are a real estate professional, an active participant in the
management of the property, and it provides a substantial (more than half)
amount of your taxable income for the year. All three requirements must be met.
There are no exceptions
Start up costs are
expenses incurred while preparing the property for rent, with the express
purpose being to prepare it for rent, before it is available for rent. These costs
do include repair, cleaning and non-recurring maintenance cost. It does NOT
include property improvements. With a normal business that produces active
income (rental income is passive) you would amortize these costs over 15 years.
But you can’t do that with a rental property. However, you can deduct a maximum
of $5000 in startup costs in the first year the rental is available for rent,
PROVIDED your total startup costs do not exeed $50,000. This is reported on
line 18, “Other Expenses” of SCH E, and should be labeled “start up expenses”.
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.
