`
cancel
Showing results for 
Search instead for 
Did you mean: 
Highlighted
New Member

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?

 
1 Best answer

Accepted Solutions
Highlighted
Level 15

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?

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.


View solution in original post

8 Replies
Highlighted
Level 15

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?

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.
Highlighted
New Member

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?

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.
Highlighted
Level 15

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?

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".
Highlighted
New Member

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?

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?
Highlighted
Level 15

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?

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?
Highlighted
New Member

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?

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.
Highlighted
Level 15

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?

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.
Highlighted
Level 15

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?

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.


View solution in original post