I paid over $37k to replace the plumbing in my rental property in 2020. What type of rental asset is this? I do not see this type of improvement listed in the options.

[rebeccao1]

Since the cost was over $10,000 I can't take the improvement as an expense, which is fine. However, I don't see any options in "Describe this Asset" that correlate to this type of improvement. It is not equipment, or land, or more property. I just need to know the correct thing to select. Thanks!

[Critter-3]

It is an improvement depreciated over 27.5 years ... follow the residential rental path. 

[rebeccao1]

Thanks - I'm already on the residential property path, and I'm confused about what type of asset it is. There is nothing in the description for permanent improvements like plumbing. Here's where I'm stuck: Rental Property>Property Info>Assets>Improvements, furnishings, and other assets>Describe this Asset>Rental Real Estate Property>Tell Us a Little More About Your Rental Asset:

The only options I get here are:

• Residential Real Estate
• Appliances, Carpet, Furniture
• Land Improvements

If I select "Residential Real Estate" it seems to be adding a new property, rather than adding an improvement to my current property, because on the next page it asks me to describe the property, include the cost of the land, etc.  I'm not acquiring a new piece of property or land, I'm making an improvement to the existing property. So would I choose the "appliances, carpet, furniture" option? If I do need to select the "Residential Real Estate" option, can you explain how to determine the "land" value on a condominium (would I enter the original purchase price from 2006)?

[rebeccao1]

I was able to get in touch with a TurboTax agent, and thought I'd update this question for anyone else looking in the future. We determined that the confusion I was having was because I hadn't yet set up the property itself to be deprecated. I made that choice originally because this is our primary home that we're renting out (not a property we purchased to be a rental). After speaking to the expert, I decided not to add the property as a rental asset, and not to deduct the plumbing expenses as an asset to be deprecated - instead, I will take the full sum of the plumbing expense against the total sale value to reduce my capital gains tax in the future when we sell.

[Critter-3]

You CANNOT avoid taking depreciation that is required then try to take it all in the end... that will not work.  You need to add the home and the improvements as assets in the year you place them in service ... it is not an option it is a requirement. 

[Hal_Al]

" I decided not to add the property as a rental asset, and not to deduct the plumbing expenses as an asset to be deprecated - instead, I will take the full sum of the plumbing expense against the total sale value to reduce my capital gains tax in the future when we sell."

No, that's wrong. The building and the new plumbing asset must be depreciated over 27.5 years.

If you are just staring to rent this house, you can simply add the $37K "improvement" to your house cost basis and depreciate the new total.  Otherwise you depreciate the house as one "Residential Real Estate" asset and the Plumbing Upgrade as a separate asset

[rebeccao1]

I spoke with a TurboTax agent who is the one who recommended this approach, so I think maybe the above commenters misunderstand my situation. To reiterate: this is our primary home that we're only renting out temporarily (as I mentioned above). We plan to move back into this residence in the next year or two. It isn't "rental property" - it's our primary (only) residence that we're temporarily renting out to save funds during the economic crisis. You are saying that because I've rented it out for any period of time, I am now required to take a few years of deprecated value rather than the full value of the expense when I sell? If this is true, since I will only be renting the property (and receiving income from it) for a few years, I would only be able to receive a very small portion of the value of the expense.

If for some reason our circumstances change and we decide to turn this into a permanent rental, I'll go ahead and start deprecating the property as an asset at that point. But I don't think that I am "required" to turn my primary residence into a deprecated asset for just a year or two of rental. I trust the advice I received from the TurboTax professional who spent 45 minutes on the phone with me today - but I'm now very confused. Please let me know if I was given incorrect information from TurboTax, or if I'm somehow misunderstanding your comments. Thank you!

[Hal_Al]

 @rebeccao1  said "You are saying that because I've rented it out for any period of time, I am now required to take a few years of deprecated value rather than the full value of the expense when I sell?"

No. You still get to deduct (add to your cost basis) the full value of the improvement cost ($37K) when you sell.  But you also have to "recapture" the depreciation you took or should have taken, when you sell.  For example, if you rent for 2 years, that Plumbing improvement will depreciate $2690. So when  you sell in the future, you only get to "deduct" $34,310 (37000 - 2690), because you shoulda deducted $2690 earlier.

The same rule applies to the cost basis of the house itself. 

You are not required to take the depreciation while you rent it out.  But you are required to recapture the depreciation when you sell, whether you actually  claimed it or not.  So, you should claim it to get the current year deduction.

I'm not aware of any exceptions for intended short period rentals.  But l'll solicit some other opinions for you. @Anonymous_  @Carl 

[Anonymous_]

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@Hal_Al wrote:

You are not required to take the depreciation while you rent it out.  But you are required to recapture the depreciation when you sell, whether you actually  claimed it or not.  So, you should claim it to get the current year deduction.

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I concur with @Hal_Al here; you will be subject to recapture when you sell regardless of whether or not you claim the depreciation deduction.

Per Section 1.1016-3, the recapture amount will be the depreciation allowable where no depreciation deduction has been claimed.

[rebeccao1]

Thank you! Sounds like I need to call again and speak to another agent. Just to make sure I understand you correctly, you're saying that there is no way for a homeowner to take the full value of a major expense/improvement against the sale of a home, regardless of whether its a rental. The major expense must be deprecated and only the deprecated value counts against the home value when the home sells. So even if I weren't renting, I wouldn't be able to just claim the full amount of the improvement in the future when I sell - I will have to deprecate it. Am I understanding that correctly?

In which case yes, it makes much more sense for me to go ahead and list the property as an asset even just for a year or two, and take a minor write-off for the deprecated value of the expense for two years. Thank you so much for taking the time to steer me in the right direction! I will definitely make this adjustment on my return.

For future reference (and any other confused homeowner who runs across this): Where would I record in my tax return future major expenses (when I'm no longer renting) that would need to be deprecated? Eg. in five years we are no longer renting, and we replace the electrical, but we don't sell for another 15 years. Is there somewhere I need to record this when it happens, or do I not record the major expenses anywhere in my taxes (just keep the receipts) until the time of the sale, at which point presumably TurboTax would ask for the year/amount of the expense and do a calculation for me? I'm assuming it's the latter, but I want to make sure I understand.

Thanks again for all of your help.

[Hal_Al]

 Your question is academic, if you intend to convert it back to your home.  A home sale, in the future, qualifies (under current law) for a $500,000 capital gain exclusion (married filing jointly). You will have to pay tax on the depreciation recapture, for the short rental period, but not on the overall gain.

Q. The major expense must be deprecated and only the deprecated value counts against the home value when the home sells?

A. No!  Just the opposite. The undepreciated value counts against the sale price.

Q. Where would I record in my tax return future major expenses (when I'm no longer renting) that would need to be deprecated? 

A. You do NOT use your tax return, or even the TurboTax software to record that info. You keep a separate file with that info.

Q. TurboTax would ask for the year/amount of the expense and do a calculation for me. 

A. No. When you sell, TT will ask for:

1. the sale price
2. the cost basis, which you will calculate by adding all the improvements (like the plumbing and electrical) to the the original cost
3. the amount of depreciation previously claimed (or shoulda claimed)

All of which you will get from your own records

[jennar]

And - if you move back in, and later sell, you could have a partial reduction of the exclusion ($250k/$500k currently) for personal residence since you rented it for a period of time-  depending on what you see and your particular situation, etc. Just something to keep in mind down the road!