I started a seasonal rental. So I have expenses (i.e. spring landscaping) before the rental season really starts (summer). Can I deduct these expenses?

[Carl]

YOu need to provide a bit your detail. In tax parlance the term "seasonal rental" doesn't exist. There's short term rental and long term rental. The definition of short term rental depends on your state, and the definition of a short term rental can be further narrowed by the locality of the property. I can pretty much figure out that at best, you're looking to rent it for 6 months a year at most. But will you be renting it on a weekly basis? Monthly basis? Something else? When it's not a rental, then what will you be doing with the property? Using it as a primary residence? 2nd home? vacation home? Something else?
THis matters because in some states and locales your "businesss" could be classified the same as a hotel or B&B and taxed as such.  Here's some data that may help. Under most circumstances all rental income and expenses is reported on SCH E. But there are exceptions.
 - If you provide services to tenants on a recurring basis then you may be classified as an active business. For example, if you provide room cleaning services, shopping services, meals, turn down services or something of the such on a recurring basis then you are running an active business that gets reported on SCH C. Note that if you are paying a third party to provide these services, then it's still you providing those services, even though you may not be the one performing the services on a regular basis.

[mrd01]

Thanks Carl. No services provided to tenants; rented on a monthly basis. It was rented for six months in 2017. It's a rustic building that isn't available all year. The building has no personal use at all when it is vacant.

[Carl]

Then you have to report all your rental income/expenses on SCH E as a part of your personal tax return. To make your life simple at tax time each year, this is how you need to do this. But I'm going to explain a few things first.
Rental income is passive income. That means you don't actually do anything to earn that money. All you do is "sit there" doing nothing and collecting the rent. Passive income is of course, taxable income. But it's not subject to the additional self-employment tax which currently is 12.6% in addition to whatever your regular tax rate may be (which is based on your income tax bracket.).
Earned income is income you make by "doing something" on a recurring basis to earn it. When you are self employed this earned income is subject to regular tax, and the additional 12.6% self-employment tax.
Now the SE tax is basically the employer side of social security and Medicare. So passive rental income does not contribute to your personal social security account, or Medicare. Additionally, you can not count passive income when figuring your maximum allowed contribution to your IRA either.

You'll basically work this through the Rental & Royalty Income (SCH E) section of the program. But pay attention to detail. In a separate answer box I've posted some information that is vitally important. It's extremely important that you set this up correctly in TurboTax the first time you do it. Otherwise, mistakes can grow exponentially over time and be costly to correct if it's a fair number of years down the road when you catch that error.
So my all means, if you have any questions as you're working this through, please ask. I've been doing the rental thing for 25 plus years now. Got lots of experience in this, but still have more to learn also. It never ends. 🙂
One last question: Since you call this a "seasonal" rental, what is the status of the property when out of season? Is it still available for rent? If so, is it realistic that it could be rented? Maybe you use it as a "hunting lodge" for you and friends in the winter?  I ask this, because if it's high in the mountains and snowed in for 6 months a year, then while it may be available for rent, the chances of actually getting a renter in it would probably be zero percent. In such a case, the honest answer is "no, it's not available for rent".

[mrd01]

Thanks again, Carl.  It appears I am using the phrase 'seasonal rental' differently from how the IRS (or at least TurboTax) uses it.  It is not a vacation home with short term renters, it is just a rental that we only make available seasonally. This is very common in our area, which has a big tourism economy and lots of seasonal workers.  So, for tax purposes I believe it's more like a regular rental which isn't in service 365 days of the year.

I am still wondering - can I deduct expenses related to having the seasonal rental ready before it's in service?  It sounds like the answer is no.  But I know I will always have such expenses - cleaning expenses in the spring, landscaping, minor repairs, etc.   

It also sounds like the answer to this may be slightly different in the first year, when these expenses could be start-up expenses (if I met the criteria to be allowed to do this, which I don't); and when they would not be start-up expenses but merely in-between expenses during the off season.

If the answer is no, it has management implications going forward. For instance, we might try to delay some of those costs, post the place as available for rent a little early, and start squeezing in those expenses as soon as we've put the place in service, and try to wrap up all the expenses before the tenant moves in (this last one, for the sake of the tenant, not for tax reasons).  

Is the answer also no for capital improvements? If so, how do you ever make capital improvements (i.e., bathroom remodel) that you would only reasonably make when the property is vacant?

[Carl]

You are right in that you don't qualify to claim any startup costs. That "startup costs" area is a grey area among CPA's and Enrolled Agents. But from the one tax attorney I talked with many years ago, it's not grey at all. His (and mine) interpretation of it is that it's just flat out not deductible under any circumstances for SCH E income/expenses. The IRS Pubs deal with startup expenses for an "active" business, which is reported on SCH C. But rental income is passive, and this is particularly true in your case. So claiming startup expenses yearly would eventually raise a flag, and chances are the IRS would disallow all startup expenses for prior years also. You don't need that headache, or the expense of what such IRS findings would cost you down the road either. But it's something that I would like to be  'fly on the wall' for if I ever hear of it being challenged in court.

Basically for your situation All repair and maintenance expenses incurred prior to the property being available for rent are just flat out not deductible. But property improvements (which you refer to above as capital improvements) are in a sense. Remember, as stated below property improvements add real value to the property, regardless of when those improvements are done and regardless of if the property is classified as a rental or not.

As explained in the answer below, property improvements are entered in the assets/depreciation section. You tell the truth on both dates asked for and you'll be fine. First, there's the date the cost for the improvement was incurred. Heck, that could have been years ago, so long as you incurred the expense after you purchased the property. Then you're asked what date that property improvement was placed "in service". That's generally the same date the property was placed in service and available for rent. Depreciation starts on the "in service" date, not the date you incurred the cost of that improvement.

Now you say there's "landscaping" expenses. What kind of landscaping? I ask, because if you do something like cut down the forest of trees in the back yard so as to make the back yard actually usable, that's a land improvement that adds to the value of the land. But it's not a deduction or depreciable. It just helps by adding to your cost basis so as to reduce your taxable gain when you sell.

But if you're talking sprucing up the flower beds, cutting the grass, treating the yard for ticks and the such, that's not landscaping the IRS would agree adds to your cost basis, as it's done on a recurring basis. It's a maintenance expense and if incurred before the property is available for rent, then you just can't deduct it. But lets look at this a different way if you are willing to amuse me.

You say you only make the property available seasonally. So if I'm understanding your correctly, you're saying that if a renter wanted to sign a 12 month contract, you would refuse? I'm asking because if you do not use the property for personal use at any time during the year, why not make it available the whole year? I'm asking these questions because the action of removing it from service and then placing it back "in service" each year is costing you in lost deductions. What's more important to you? Keeping the depreciation to a minimum each year? Or taking all the deductions you possibly can legally each year without raising flags with the IRS?

[mrd01]

Thanks, Carl. This is all very helpful.  If someone wanted to stay 12 months, we would let them. But primarily the housing fills a seasonal need for the summer tourism economy and its unlikely. It is also not really a big enough place for year-round living, but it is just fine for a young person with a summer gig. It's quite common in this area. We have thought about posting a 'for rent' sign somewhere in the fall, but we worry about the headache about getting some potentially desperate people contacting us looking for a place to stay. Perhaps it would be worth this risk, but that is basically why we have thought we would avoid advertising it.  If we got lucky and someone wanted to stay, that's a different matter.

[Carl]

So then the property is "available for rent" year round then, right?
"we worry about the headache about getting some potentially desperate people"
I'm not aware of any law, rule or regulation that says you absolutely have to accept someone who applies to rent from you. But I'm in FL too, and for my rentals I conform to the laws of my state, as I'm sure you do for your state.
With your current plan, every year you're making the property available for rent say, May1st for example, and then converting it back to personal use on Oct 1 for example. So expenses incurred before May 1st and after Oct 1 are just flat out not deductible. Being that the off season is when you incur most of your expenses, don't have an off season "on the books". Keep it classified as a rental all year round.
Then during your off season you keep advertising it. The trick (and there's nothing illegal about it that I can find anywhere) is to make the advertised rent to high for anyone to be willing to pay it, without going overboard on that price. Then your advertising while it's vacant is your "proof" of it's availability.
If you normally rent for $1000/mo during the spring/summer early fall, then for the winter raise the advertised price to $1200/mo. Then if you do get a call for it at that price, I seriously doubt those enquiring would fall in the "trash renter" category.  For me renting year round, I keep my price high enough to keep the "trash calls" down, but low enough to attract the type and class of renter I want living in the property.
If my price range fits yours, then what I would do is make my winter price absolutely no more than 25% above the price I know I can get. You don't want to go overboard on that for obvious reasons. Chances are, I'll get no calls. But the fact is, the property is "available for rent" and I can prove it by the fact the property is move-in ready and I've got a record of all my advertising renewals on craigslist, Zillow and rent.com. Oh, if someone does call and is willing to pay the higher price, show me the money, sign the contract, and here's the keys!
Oh, and so long as the property is available for rent, my advertising costs are deductible too. By keeping the property classified as a rental year round that makes all expenses incurred for the property throughout the year a rental expense.
Grab my notes all all this stuff at <a rel="nofollow" target="_blank" href="http://burchrentals.ddns.net/Rentals/rental%20Property%20Management.docx">http://burchrentals.ddns.n...> It's still in rough draft (extremely rough) but a wealth of information. You'll be interested in chapter 11. But the whole thing is a wealth of information. I just gotta find the time to sit down and organize it better.

[Carl]

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.

[CPFME]

We purchased a seasonal beach house in late 2020. The water is turned on in April and off late Oct. We renovated the interior in late 2020. We plan to rent it for 2 months in 2021 and use it ourselves some of the time. It had been rented by the previous owner for similar time periods. For tax purposes when is it "put into service"? And is this date the same every year or will it be January 1 after this first year? I am trying to determine how to calculate expenses against rental income: ratio of our use to rental use? Or just expenses incurred during the rental time? We do have mortgage on the property. It will sit empty for the balance of the year.

[Carl]

There are several ways to do this. Based on the information you've provided, along with my understanding and interpretation of that information, here's what I recommend for the most tax benefit.

For your 2020 taxes, this property is nothing more than a 2nd home. Therefore you can only claim the mortgage interest and property taxes actually paid in 2020, as a SCH A itemized deduction on the 2020 tax return.

Since you will only be using the property for personal use for at most, 2 months out of the year each year, I recommend you place the property in service with an in service date of the first day a renter "could" move in, and leave it in service and classified as a rental for the entire year. You never take it out of service, and you never convert it back to personal use. Note that on the legal front, you'd have to be advertising this property for rent for the entire year, with the exception of the period of time you intend to use it for personal use.

We plan to rent it for 2 months in 2021

So your conversion date/in-service date would be the first day a renter "could" move in. It's important that you actually do get a renter in there too. On your 2021 tax return you would indicate you converted the property from personal use to residential rental real estate, with an in service date of that first day a renter could move in.  You leave that for the remainder of the year. So if it's rented in Apr-May, so long as you are "attempting" to rent out the property for the remainder of the year, all expenses incurred from Apr thru Dec are rental expenses.

Now lets say you use the property for personal purposes in the month of June for the entire 30 day month. Assuming in in service date of Apr 1st, that's a total of 274 days the property was classified as a rental. Of that 274 days you have 30 days of personal use. So you report 244 days of "business" use as a rental, and 30 days of personal use.

The program will "do the math" for you to determine that 10.9% of the time the property was classified as a rental, it was used for pursonal purposes. So with only 89.1% of actually business use, the program will allocate 89.1% of your expenses to the SCH E. For the property taxes and mortgage interest, it will allocate 89.1% to the SCH E and the remaining 10.9% to the SCH A. For the property insurance, it will allocate 89.1% to the SCH E. (Property insurance is not a deductible expense for SCH A).

It works kinda like this:

You enter the total of all actual expenses in the SCH E section of the program that were incurred "AFTER" the in-service date. Then the program will ask:
In-Service Date: 1 Apr 2021

100% business use? NO

days of business use: 244

Days of personal use: 30

Program "does the math" and determines that of the expenses incurred, 89.1% of them can be allocated to SCH E.

[judyh47]

Carl,

Thank you for this string.  It is very helpful.  

I have a 2nd home we are making into a short term rental later this year.  I have quite a few questions related to expenses incurred last year (can it be capital) and this year (start up, maintenance, deductible, etc.), but I will get to that later.   

We've owned since April 15th 2020.  We plan to post it on Airbnb with rental starting Sept 1 2021.

First I thought the personal verses rental days were based on actual occupancy not total available (might be specific to short term rentals like I have).  Can you confirm?  Say it was available 100 days, rented 50, personal 20.   I heard personal would be 20/70 (20+50) not 20/100.  

I also read maintenance days are considered vacant and not part of the calculation.  Is that correct?

And lastly, does my occupied days calculation begin Sept 1 or at the start of the year?  Say we have 20 personal days prior to Sept 1 and 20 days after Sept 1, and it is rented by guests 20 days.  Would the days I put into the software be 20 days business use and 20 days personal or 20 days business and 40 personal?

[Carl]

@judyh47 before you can get into the details you're asking about, you need to first determine if this is a SCH C business or a SCH E business.

While it may be a seasonal rental, what is a "season" to you? 1 month? 3 months? 6 months? What will the property be used for when it's not available as a seasonal rental?

Will you be providing recurring services to the tenants, that are directly beneficial to that tenant? For example, the time between renters when it's vacant and you're preparing it for the next renter, generally doesn't count because that's just a part of doing business and it's "somewhat" not considered directly beneficial to the tenant.

But if you will be providing periodic services to the tenant that are directly beneficial to that tenant while it's occupied, that counts. For example, cleaning services, laundry service, meal service, etc.

If you are providing services to the tenant on a periodic/regular basis then this "could" qualify as a SCH C business. Otherwise, it would be reported on SCH E.

I would highly suggest you get with a tax pro in your area that is familiar with the AirB&B scenario to see what your options are. They can also educate you on the pros and cons of a SCH C business and a SCH E business. That knowledge would be especially helpful to you if your state also taxes personal income. In some places, an AirB&B rental may be subject to the same rules, ordinances, covenants and laws as a hotel is. So you really need to seek professional help setting this up for your first year.  You've already started doing it the smart way by asking questions "before" taking the chance on learning things the hard (and expensive) way.  You'll find the money for the professional help to be well worth it, and the amount may be a pittance when compared to the costs you may risk incurring by not educating yourself first.

Then, after that first year if you want to deal with the tax front yourself on this with TurboTax, you most certainly can.

[judyh47]

It's schedule E and will be available year round starting Sept 1.  Also used as personal vacation property hence the concern with tracking the day usage properly.  I am sure we will have more than 14 days personal use and more than 14 days of rentals.  

I did sign up for TurboTax live premiere since it say they would help setting up the rental.  When I called they said they only help when filing taxes, and I told them I needed help to make sure I set it up properly and was tracking what I needed to track so that I can file the taxes.  

[Carl]

Basically, you classify it as a rental for the entire year. Doing the converting back and forth between rental and pesonal use every year is a real PITA.  With SCH E rental property there are no start up costs. They're flat out not deductible, as there are no provisions for start up expenses on the SCH E or in the tax code.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2^nd home before, then this date is the day AFTER you moved out, or the date you decided to lease the property – whichever is later.
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 was contracted to move in, and/or "could" have moved in. That would be your "in service" date or after if you were asked for that. Vacant periods between renters do not count for actual days rented. Please see IRS Publication927 page 17 at https://www.irs.gov/pub/irs-pdf/p527.pdf#en_US_2020_publink1000219175 Read the “Example” in the third column.
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, 2nd home, or any other personal use reasons after you converted it to a rental.  If you did, then your number of days rented plus days of personal use can not exceed the day count starting from the date you placed the property in service, to Dec 31 of the tax year.
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. If you have personal use days, the program (not you) will change that percentage.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.

Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.

Expenses for these types of costs 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 basic criteria need to 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 retain or 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.

There are rules that allow you to just flat-out expense and deduct some property improvements instead of capitalizing and depreciating them, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the usable 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 the very first time are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same usable 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 the very first time 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 3^rd 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.