@Critter @Hal_Al @TomD8 @sonnet if you will look at the date/time of the original post in this thread, as well as the original "best answer" you will see that both have the same exact posting date/time of June 7, 2019 6:01 PM. This is actually the exact date/time this thread was copied over from the old forum to this new forum. The thread itself is several years old and out of date. Thusly, the information given in this thread for 2019 is conflicting, confusing, and some of it incomplete.... not necessarily wrong. (though one response provides flat out wrong information.) Here's the scoop for 2019.
If my rental home hasn't been rented in the last two years, do I still have to claim it as an investment property? I have had no income from this property in two years.
You have two choices.
OPTION 1: Convert Property to Personal Use
1. Convert the property to personal use effective Jan 1, 2019. You can not claim one penny of rental expenses. When asked for days rented you'll enter ZERO for days rented, and ZERO for days of personal use. DO NOT under any circumstances select the box for "I did not rent or attempt to rent this property at all in 2019. If you do, then you'll be FORCED to delete the SCH E. Do that, and you're screwed.
For rental income, you'll enter a ZERO.
For rental expenses, work it through. But you don't have to enter anything on the first two "Common Expenses" screens. None of that is deductible since the property is converted to personal use. But you still have to work it through to the Mortgage Interest screen. If the program has auto-entered any amount above zero, you have to change it to a zero and continue working on through the expenses section.
You'll enter the mortgage interest on the SCH A which you'll deal with under the deductions and credits tab (when you get to that point in the program) in the "my home" section.
This action will stop depreciation on the property. But note that you can "NOT" deduct one single penny of rental expenses on the SCH E. In fact, you can't claim "any" deductions what-so-ever on the SCH E.
But do not confuse this with the cost of the work you are doing. If what you are doing to the property is classified as a property improvement, then it's not deductible "per-se" any way you look at it. It's capitalized and depreciated over time, with the "time" starting on the date you actually place the property back "in service" as a rental.
Once you complete the tax return it is *IMPORTANT* that you print out the tax return and confirm that you have BOTH copies of the IRS Form 4562 that are tied to this converted rental. Both forms print in landscape format. One is titled "Depreciation and Amortization Report" and the other is "Alternative Minimum Tax (AMT) Depreciation". You will NEED them both when one of three things happens in your life in the future.
1. You convert the property back to a rental.
2. You sell or otherwise dispose of the property.
3. You die.
OPTION 2: Maintain the Property as Residential Rental Real Estate
With this option, you basically "do nothing". When asked if the property was rented all year you'll select NO.
DO NOT select the box for "I did not rent or attempt to rent this property at all in 2019". If you select that box, you'll be forced to delete the SCH E. Do that, and you're screwed.
For days rented enter ZERO. For personal use days enter ZERO.
For rental income, enter ZERO.
For rental expenses you can work it through and enter the appropriate expenses. I am expecting you to have the following expenses.
- Cleaning & Maintenance
- Insurance
- Repairs (See below so that you don't mix repair costs with property improvments)
- Supplies (primarily cleaning supplies such as bleach, rags, mops, brooms, etc. Don't "double-dip" with the Cleaning & Maintenance category above)
- Real Estate Taxes
-Utilities (water, electric, gas)
- Mortgage Interest
- In Misc Expenses, if you pay HOA fees for that property, claim them here.
Now by maintaining the property as rental property during your repair/restoration process you will be able to "claim" all your rental expenses with the major ones being mortgage interest, property taxes and property insurance. However, since you have no rental income in 2019 from which to deduct those expenses, they will not be "allowed". What happens is that they will carry over to the next year where they can be deducted "IF" you have the rental income from which to deduct them.
It is "VERY" rare for rental property to actually show a taxable profit too. In fact, it's more common for the carry over losses to just carry over and increase with each passing year. This helps in the year you sell or otherwise dispose of the property because in the year of disposition, all those carry over losses can be taken against other "ordinary" income. If anything, this will reduce your taxes on the depreciation you are required to recapture and pay taxes on in the year you sell the property.
Overall, I would suggest you go with OPTION 2 if you will be renting the property out again once you've got it ready.
If any of the work you are doing is classified as a property improvement, then you will not enter the property improvements into the TurboTax program until the tax year you actually have the property move-in ready for a new tenant.
Now here's those definitions I promised to provide.
RENTAL PROPERTY 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 deductible.
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 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 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.
