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mitch-gillen
New Member

I wrote off the cost of a new roof on my rental house as an expense and deducted the total cost of less than $10,000 on this tax return, instead of deducting depreciation

 
8 Replies
Lisa995
Level 12

I wrote off the cost of a new roof on my rental house as an expense and deducted the total cost of less than $10,000 on this tax return, instead of deducting depreciation

what is your question?
♪♫•*¨*•.¸¸♥Lisa♥ ¸¸.•*¨*•♫♪
Carl
Level 15

I wrote off the cost of a new roof on my rental house as an expense and deducted the total cost of less than $10,000 on this tax return, instead of deducting depreciation

You need to file an amended return and correct it. Otherwise, when the IRS audits you 24-36 months down the road, the fines, penalties and late fees are going to kill you financially, much more than paying the taxes you will be paying when you correct this situation.

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.


angelayork1
New Member

I wrote off the cost of a new roof on my rental house as an expense and deducted the total cost of less than $10,000 on this tax return, instead of deducting depreciation

Well I was wondering about my particular situation.  I may have active income... I am only in the dark about the    " at least half of your taxable income"  thing as  I manage my own and had to quit a job in order to repair and manage these inherited rentals - so yeah this is my only "job" for now - possibly forever. I am married filing jointly.  Does my rental income have to match half of his income?   Is that rents received before expenses?   If so, can the total amount of the roof be expensed for that year? 

Carl
Level 15

I wrote off the cost of a new roof on my rental house as an expense and deducted the total cost of less than $10,000 on this tax return, instead of deducting depreciation

can the total amount of the roof be expensed for that year?

This has nothing to do with type of income, be it active or passive. The roof is an asset that is used to produce that income. So it's an asset that has to be classified as such and depreciated over 27.5 years. It's not up for debate with the IRS.

 

 

angelayork1
New Member

I wrote off the cost of a new roof on my rental house as an expense and deducted the total cost of less than $10,000 on this tax return, instead of deducting depreciation

What is special about expenses concerning "active income"? 

angelayork1
New Member

I wrote off the cost of a new roof on my rental house as an expense and deducted the total cost of less than $10,000 on this tax return, instead of deducting depreciation

Also, I couldn't insure without that expense from my pocket first - but the crappy IRS still wants me to expense $27 a year or something like that?  That figures

 

bob16165
New Member

I wrote off the cost of a new roof on my rental house as an expense and deducted the total cost of less than $10,000 on this tax return, instead of deducting depreciation

We're converting our homes basement into a B & B. Can we write off the construction costs as a deduction? The basement was already finished we just changed some flooring, added a small kitchenette in a corner and added a door to separate it from the house. We also purchased some beds, a small amount of furniture, dishes, appliances and art/decorations. 

 

We did all the work in 2020 and it won't be ready until March 2021. How does that affect anything, if at all?

 

I appreciate your time. 

Critter-3
Level 15

I wrote off the cost of a new roof on my rental house as an expense and deducted the total cost of less than $10,000 on this tax return, instead of deducting depreciation

The total cost of the conversion needs to be depreciated and can be entered as a separate asset from the house which also needs to be listed as an asset.   

 

The rest of the furniture/supplies could be depreciated or expensed  depending on the total costs of each item.

 

But since this B&B was not put into service until 2021 nothing is reported on the 2020 return.   You have a year to either read up on rules of being a landlord and/or seek local professional assistance to set up your books or file the first Sch E.    https://www.irs.gov/pub/irs-pdf/p527.pdf

 

 

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