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ptdang80231
New Member

I recently had to remodel my rental property, sole prop, ~$50K, can I still write this expense off, under Trump new tax plan for this rental property?

 
4 Replies
ptdang80231
New Member

I recently had to remodel my rental property, sole prop, ~$50K, can I still write this expense off, under Trump new tax plan for this rental property?

do i need to establish and LLC or keep it as a sole prop to be able to write this expense off?
Hal_Al
Level 15

I recently had to remodel my rental property, sole prop, ~$50K, can I still write this expense off, under Trump new tax plan for this rental property?

What does "sole prop" mean? Sole property or sole proprietorship? You do not usually report rental income on Schedule C (sole proprietorship). Rental income goes on Schedule E.
An LLC is a legal entity. For tax purposes an LLC is a pass thru entity. The income, expenses and depreciation still gets reported on your Schedule E or C.
$50K is too much to write off on a rental property. It must be depreciated.
ptdang80231
New Member

I recently had to remodel my rental property, sole prop, ~$50K, can I still write this expense off, under Trump new tax plan for this rental property?

Thanks Hal_Al!  I meant Sole Proprietorship.  I want to depreciate it as I have invested more money into the property.  Do you recommend creating an LLC given the new tax rules that Trump just signed in to law?
Carl
Level 15

I recently had to remodel my rental property, sole prop, ~$50K, can I still write this expense off, under Trump new tax plan for this rental property?

You say you "recently" remodeled. Therefore, that would mean you incurred this expenses prior to 2018. So nothing changes for you on this for your 2017 tax return.

Also, what you are calling an "expense" can easily confuse other readers, as it's more than likely not an expense, but a property improvement. Property improvements are entered in the Depreciation and Assets section and depreciated over time. They are not expenses that can be "deducted" per-se. (Just clarifying for other readers, is all.)

Also, rental income and expenses is reported on SCH E and not on SCH C, unless you are running the equivalent of a hotel, such as folks do with AirB&B, or you run a hostel out of your home.

Your comment "I want to depreciation it" can mislead folks into thinking they have a choice on this. Rental property and rental property assets are required by law to be depreciated. There is no choice. If you don't depreciate it, then when you sell or otherwise dispose of the property later, you are required to reduce your cost basis on the property by the depreciation you "should" have taken. This can significantly increase any taxable gain realized from the sale of the property. For other readers (because I know you're already aware of this) the below provides clarification.

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.


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