Purchase price of the home + closing costs + improvements & repairs to make it rent-able = cost basis for depreciation when you start renting the property.
Unless you meet very explicit and specific criteria, the cost incurred of "preparing the property for rent" are not deductible when converting from personal use to rental real estate, or if you purchased residential rental real estate with the intent of making it a rental from the get-go. . Very few meet those conditions, which are included in the below information. Do note however that in many cases, what you may be calling expenses, may actually be classified as property improvements, which is totally different.
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 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 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.
@ramsgusom this post is over two years old. For rental property, start up costs are not deductible at all. Period. I've edited my 2 year old response above to reflect that.
For a rental property that is not yet placed in service, if cleaning, maintenance and repairs are not deductible since not in service yet, can they be added to basis or do you lose out on the deduction? What about property tax and insurance, are those deductible if property not yet in service?
Until the property is available for rent and is advertized for rent the carrying costs are considered personal which are not deductible except the RE taxes and possibly the mortgage interest on the Sch A. You could choose to capitalize the carrying costs so look into that if you choose. https://somersetcpas.com/section-266-election-for-investment-property/
For a rental property that is not yet placed in service, if cleaning, maintenance and repairs are not deductible since not in service yet, can they be added to basis or do you lose out on the deduction?
No. Costs incurred prior to the property being placed in service for the very first time are personal costs, and are never deductible. They do not add to the cost basis just like repairing the broken toilet in your primary residence does not add to it's cost basis.
What about property tax and insurance, are those deductible if property not yet in service?
Property insurance is not a deductible expense for the period of time the property was personal use, just like it's not a deductible expense on your primary residence. Property taxes and mortgage interest are your only deductible expenses, and they are an itemized SCH A deduction.
Now property insurance, property taxes and mortgage interest are a deductible expense on the SCH E after the property is placed in service. In that first year, mortgage interest and property taxes are prorated between SCH A for the period of time the property was personal use, and SCH E for the period of time the property was in service as a rental.
The property insurance is prorated and that prorated amount is deductible on the SCH E for the period of time it was in service as a rental. The property insurance for the period of time the property was personal use is not deductible anywhere on your tax return.
Thank you for the information. Does any of this change if considered a real estate professional or dealer for tax purposes? We do house flipping and decided to keep one of the houses as a rental. Does having the real estate dealer status allow any deduction of items that would otherwise have to go on schedule A?
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.
Does the above statement still apply in 2022/2023? I owned a home since 1999, in 2021 I did several improvements and repairs to prepare it for a rental. (I got remarried and moved to his home in Dec 2022). I publicly listed it for lease 12/16/22 with a note of an approximate available move-in date of 1/1/23 while the finishing touches were being completed. I finally got a tenant on 3/24/23.
I am struggling with what the current rules are as far as improvements. Can those done in 2021 count on this years taxes, or only those from 12/16/22 forward? Do I add them all up and enter the lump sum of the improvements to be depreciated over time?
It was a rental starting 1-1-2023 because that was when it was ready.
No, you can't expense or list the improvements made in 2022.
The improvements you made before 1-1-2023 are added to the basis, so if you paid 250,000 and added 10,000 as improvements, your "basis" is 260,000 (or whatever Fair Market Value is if FMV is LESS)
This "adjusted basis" is what you enter as the basis of the rental to start the depreciation. (remember to allocate part of the cost to the land, and land does NOT depreciate)
Any additions (such as appliances) going forward from 01-01-2023 will be added as a separate item and depreciated on their own.
Keep track of depreciation claimed since this will be needed when the rental is sold or converted back to personal use.
At that time, you will also need to allocate part of the selling proceeds to the remaining assets (such as appliances).
Since your rental started 01-01-2023, you won't report it on your 2022 Tax Year return.
My sincere apologies, it had a rough ready date of 1/1/2022 not 23. That was a typo. I bought it for $81,000 total in 1999 and seller gave us $2430 towards closing costs. I cant find my original paperwork right now. Where can I find the land vs bldg value at that time? Also, do I need receipts etc for all of the improvements made over the years to be able to count those? I know I replaced roof, did the foundation, replaced a/c and furnace, etc all in the last 10 years or less. More recently in 2021 we replaced all the carpet upstairs, added some porcelain flooring down stairs. Replaced several windows and upgraded many of the walls insulation. Replaced the back fence with cedar fencing. Added some hardi plank to the exterior of the home. Replaced some plumbing pipes and all the faucets and plumbing under the sinks.
Once rented we purchased a different fire/hazard policy, a flood insurance policy, an umbrella policy and also a home warranty.
I listed it for lease 12/2021 and it rented out 3/2022. Repairs were completed roughly 1/1/2022.
You can look at your Property Tax Bill to find the % Allocated to Land/Building. For example, if your bill shows 100K allocated to Building/Improvements, and 20K allocated to Land, then land is 20% of the total.
You can estimate the value of Capital Improvements you made prior to renting to establish a Cost Basis for your Rental Property. Add that amount to what you paid for the property. Then allocate % to Land, as per example above. You may want to write out a list of the Improvements you made, with dates and estimated amounts, to keep for your records to show how you arrived at the cost basis amount you entered.
However, since you listed it for rent 12/2021, any Capital Improvements done after that date should be entered as a Rental Asset. If the work done between 12/2021 and and 03/2022 was not major capital improvements, claim it as a Repair expense. If you do enter capital improvements as an asset, you will be presented with several options on how to claim the expense in the first year, depending on the type of asset. Appliances can be depreciated over 5 years, a new roof over 27.5 years, the same as the property, for example.
You can claim the cost of the home warranty, fire insurance, flood insurance and umbrella policy as Rental Expenses.
Here's more info on Rental Property Depreciation.
@listed4uk to recap.
Property improvements done any time after you purchased the property are added to the cost basis of the property. It does not matter if the property was your primary residence, 2nd home, vacation home, rental, or anything else while you owned it, when the improvements were done. They still add to the cost basis of the property.
With the only exception being property taxes and mortgage interest, ny other expense, such as maintenance, repairs, etc. incurred "before" the property was available for rent and move in ready "for the very first time" are not deductible at all, anywhere on the tax return.
If the property was not available for rent and move-in ready on or before Dec 31 of the 2022 tax year, then you have nothing to report on your 2022 tax return. The below applies regardless of what tax year you report this for; be it 2022 or next year when you complete your 2023 tax return.
Property improvements done to the structure add to the cost basis of the structure. Some land improvements (not all) add to the cost basis of the land. I am assuming all property improvements done since you originally purchased the property were done to the structure on that property.
I reference my post in this thread with a date/time stamp of June 14, 2019, 11:04PM.
When you initially enter this property in the program, there will be a point where the program will ask you for information from your latest property tax bill. Absolutely nothing on that property tax bill is reported to the IRS or any other taxing authority. (such as your state, if your state taxes personal income.) Typically, the local property tax assessor will value the property on average, 30% below it's FMV. The values assigned by the property tax assessor are used only by the local taxing authority that assessed property taxes for the purpose of determining how much you will pay in property taxes each year. That's pretty much it. (Though other entities may use the tax values for other purposes that have nothing to do with taxes.)
The program uses the information from your most recent property tax bill for the sole purpose of determining what percentage of your original purchase price gets allocated to the land. That's it.
Let's say you purchased the property in 1999 for $81,000. But your latest property tax bill shows a tax value of $41,000 with $32,000 allocated to the structure. (on some tax bills that will appear as "improvement value" or something similar.) Simple math reveals that the land value *for property tax purposes only" is $9000. More math reveals that $9000 is 21.95% of the total $41,000 tax value. Let's round that up to 22% to keep it simple.
Your original purchase price was $81,000, and 22% of $81,000 is $17,820. Therefore, for depreciation purposes your total value is $81,000 with $17,820 allocated to the land and the remaining $63,180 allocated to the structure. Since land is not depreciated, your depreciation will be figured, based on the $63,180 allocated to the structure over the next 27.5 years. But we're not done yet. Lets deal with a property improvement you did before it was a rental. There's two possible ways to deal with this, and I'll cover both ways.
Let's say you put on a new roof in 2017 at a cost of $20,000.
Method 1:
Leave what you already have from above, and enter the new roof as a completely separate asset, which of course would have the same "in service" date as the property itself. Depreciation on that $20,000 would start on the same day as the property itself does.
Method 2: Since the roof was done before you converted it to a rental, you can just add that $20,000 to the structure value, which means depreciation will be based on $83,180 over the next 27.5 years.
Overall, I would recommend you use Method 2 if you expect to own this property past the 10 year life expectancy of the roof. Now while a roof has an expected life span or the IRS tables, there's a good chance that you'll have to replace the roof after 10 years, or risk your insurance company dropping you. Using method 2 you'll be able to "write off" the remaining depreciation on the roof when you replace it with a new one.
Now, other than mortgage interest and property taxes, any repair, maintenance or utility expenses incurred before the property was available for rent and move in ready for that very first time, are just flat out not deductible at all anywhere on your tax return.
Now you mention repairs were completed on 1/1/2023. Could a renter realistically have moved in and fully occupied the property prior to 1/1/2023? If so, could the repairs still have been accomplished after the renter moved in? If yes, then I would declare the property as available for rent and move in ready in Dec of 2022 and go ahead and start reporting it on my 2022 tax return. The fact you have zero days rented in 2022 doesn't matter, so long as it was available for rent and move in ready on whatever day you declare it "in service" in 2022. That way, you can deduct your 1/1/2023 repair expenses on your 2023 tax return when you complete it next year. Otherwise if no, then I wouldn't bother with reporting anything concerning the rental on the 2022 tax return.
Marilyn/Kris - would all the advice in the posts above apply the same if the house is used as a short-term rental property. (Some of the earlier posts in the chain mandated that personal days were 0, etc. which is appropriate if it's a long-term rental, but not always the case when you use it for short-term rentals like airbnb, VRBOs.) Situation is home was purchased as a second home and after a couple of years was converted to a short-term rental property in the middle of the tax-year. Since the "start date" the owners spent less than the 14-day annual limit in the home for personal use. CPA said that would be fine if measured from the start date. Owners spent a lot (furniture, lighting, general maintenance, household items) to spruce up the house in order to convert it to a short term rental. Is none of that expense deductible unless it is added to the cost basis? And where does one start the cost basis (original purchase, remaining morgage, value of home)?