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Gator-Nation
Returning Member

Partial damage to rental from Irma. Claiming expenses, changed basis

I had damages to a rental property due to Hurricane Irma.  The damages were not covered by insurance since they were flood damage.  This affected only part of the residence.  I was able to rent out part of it.  How do I enter data for Form 4684?  How do I list expenses for repairs?  How does this affect the basis when I sell?  Thanks


4 Replies
Carl
Level 15

Partial damage to rental from Irma. Claiming expenses, changed basis

I think all you need is definitions to know the difference between a "repair" and a "property improvement". Property improvements adds to the cost basis of the property. Repairs are just a deductible expense. I doubt you have anything that would be classified as a repair, if you fixed hurricane damage that made the property or part of the property unusable. Here's those definitions. Meanwhile, if you have more questions then by all means asks. Hopefully, this saves you the time.

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.


Gator-Nation
Returning Member

Partial damage to rental from Irma. Claiming expenses, changed basis

There is a form 4684 for Casualties and Theft. There is a separate provision for Hurricane Irma damage.  By using 4684, how do I list repair expenses (since this calculates a before and after FMV) and how does listing a lower FMV affect my basis when I sell?  Thanks
Carl
Level 15

Partial damage to rental from Irma. Claiming expenses, changed basis

If you want to go this route (which I don't recommend) you most certainly can. But understand that your casualty and thefts claim is dealt with outside of and completely separate from, the SCH E. In fact, you have to work that through "first" to get your bottom line figure of allowed loss, before you can make any adjustments to the cost basis of anything. So go ahead and work this trough the "Casualty and Thefts" section under the Deductions and Credits tab first. Overall, I would recommend professional help this year, because more often than not, those that do this themselves tend to get it wrong. So here's the pointer on that.
When entering the numbers, you do not and can not include the value of the land.You do not have a loss of land at all. You only have loss or damage to the structure itself, and that's it. If insurance is involved, then understand that for rental property there is no insurance on the land. Insurance providers do not insure land. They only insure the structures on that land.
So when the program asks for FMV before and after the loss, the values you enter will not include the value of the land. You enter the value of the structure's "only" that are on that land. That would include the FMV of things like a fence, the driveway, damage to the in ground swimming pool, etc. Not the value of the land at all.
I still suggest you get professional help this year, because in years past I see tons of refunds delayed or folks having to pay some or all of their refund back to the IRS because they did it all wrong. It can make the cost of professional help seem like a pittance in comparison.
Gator-Nation
Returning Member

Partial damage to rental from Irma. Claiming expenses, changed basis

Thanks, Carl.
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