In November of 2019 my wife and I purchased two single family homes that are going to be used for rental properties. It took us time to repair and improve the properties (general fixes, new HVAC on both, etc, etc). The properties were not rented out at all in 2019, although we incurred purchasing expenses, repair expenses, and improvements that would normally be depreciated. My problem is that I can't seem to treat these as rental properties due to the lack of income in 2019.
I have found articles that say that the right way to treat this, is to declare the home as a "second home" for 2019 and then covert it's use for 2020. That would work for one property. As I understand it, you can only have one "second home". I have two properties with the same $0 problem for 2019. Does anyone have any idea on how to handle this situation?
I appreciate any help.
You MUST capitalize all the purchase costs + improvements and enter the total as the basis for depreciation once you place the rentals into service. The ONLY thing you could deduct on the Sch A would be any RE taxes you possibly paid.
The fact the properties were not rented in 2019 or did not produce income in 2019 really does not matter in some cases. The thing that matters is the date the property was *AVAILABLE* for rent. That would be the first day a renter *could* have moved in. Generally, that's the day you put the FOR RENT sign in the front yard.
So if a property was available for rent on Dec 31 of 2019, it's in service date is Dec 31,2019.
Days rented is 1 (ONE) and days of personal use is ZERO. Business use percentage is ONE HUNDRED PRECENT.
The fact you have $0 income for 2019 *does* *not* *matter*. You just enter a zero for the 2019 rental income. Most likely, you will have zero expenses for 2019 to. But you will still enter mortgage interest paid in 2019 along with any property taxes and property insurance paid in 2019. The program will take care of pro-rating based on the in-service date. But don't be surprised if you still get zero for deductible expenses with an in service date of Dec 31, 2019. Besides, if you do get any expense, it will just be carried over to 2020 since you have no rental income from which to deduct those expenses anyway.
Finally, remember that repair and maintenance expenses incurred *BEFORE* the property was placed in service are just flat out not deductible. Period. Of course, your property improvements still get entered in the assets/depreciation section and *IF* any depreciation is taken on them for 2019, it just gets carried over to 2020.
The below guidance will help you get this entered correclty in the program the first time. For that first year dealing with rental property in the TurboTax program, perfection is not an option; its an absolute MUST. Even the tiniest of mistakes will grow exponentially as the yeara pass. Then when you catch the mistake years down the road the cost of fixing your boo-boo *will* *be* *expensive*. So if you have further questions, don't guess, as guessing can cost you $MONEY$ later. Please ask.
Rental Property Dates & Numbers That Matter.
Date of Conversion - If this was your primary residence or 2nd home 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 PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
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.
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.
Thank you for the incredibly detailed feedback. There is a lot of good information in your reply. The part tha ti should have been more clear about is that these properties were purchased in November of 2019 and were not available for rental until 2020. We listed one for rental in March of 2020 and it rented quickly. The other is still not available for rental (thanks pandemic). Since neither of these was available for rental in 2019, I'm still unsure how to enter them. Improvements were made in 2019 and real estate taxes were paid at closing, so how do I treat these properties if they we not available for rental until 2020?
Again, thanks for taking the time to help. Your information provided was excellent.
If they were not available for rent until 2020, they are not entered on your 2019 tax return at all.
On your 2020 tax return, as Critter mentioned, all of the expenses are combined and are part of the "Basis" for depreciation.
Improvements were made in 2019 and real estate taxes were paid at closing, so how do I treat these properties if they we not available for rental until 2020?
The property is just treated as a 2nd home. The only thing you can claim on your 2019 taxes is mortgage interest and property taxes. that's it. Period. End of Story. Under no circumstances will you enter this property on SCH E with your 2019 taxes. There are no exceptions. You'll include those two items under the Deductions & Credits tab in the "Your Home" section of the program along with the mortgage interest and property taxes for your primary residence. They'll be a SCH A itemized deduction.
That does not mean you lose your other deductible expenses forever either. When you do your 2020 taxes next year, you'll covert the property from personal use to Residential Rental Real Estate. At that time the program will walk you through the process which will include your closing costs and other things. I will give you a heads up on one thing though, even though chances are you'll completely forget when the 2020 tax filing season rolls around.
When you initially start entering the property itself in the assets/depreciation section you will be asked if you have any property improvements that were done *before* the in service date. Answer that question NO. If you answer yes and include those property improvements in that initial asset entry, then your land to structure cost allocations *will* *be* *wrong* unless the programmers fix this issue. I seriously doubt they will either.
Instead, enter "all" property improvements regardless of when they were done as a physically separate asset.
You can group together all improvements done before the in-service date, since those improvements will all have the same in service date as the property itself.
Property improvements done after the in service date of the property itself have to be entered separately, since depreciation on those improvements will start after the initial in-service date of the property.
Carl, Critter, and AmeliesUncle,
Thanks for the information. I think that I understand now. Great information adn thanks for the prompt answers.
Carl, I plan to print out this thread and put it with my 2020 information so that I don't forget your tip about treating the pre-2020 improvements.
Thanks all! Really appreciate the help.