Primary home convert to rental, have extensive repair expenses but not yet rental income for the tax year

[Lily1]

Moved from CA to WA on Jan 2018 and decided to convert my CA primary residence home for rental. Amount of remodeling, repairs and moving logistics didn't permit renting out in 2018. Remodel+repair expenses total $50k.

Can I file schedule E for 2018 with $0 rental income but claim all the rental expenses and suspend it to offset future rental income? Will separate expenses into amortized improvements vs repairs+maintenance of course.

[KrisD · Accepted solution]

Yes, the expenses would need to be carried-over if there is no income to apply them to. The improvements are added to the basis. 

Here is more information:

https://ttlc.intuit.com/replies/3288530

[Lily1]

Thx TurboTaxKrisD! Really helpful. A couple of follow-on questions on this rental

Have family member that may decide to move into the home 1 year from now. If I decided not to rent out in the interim (2019, avoid the headache of brief rental), I should be able to continue to suspend 2019 losses right?

If the family member decides to live there, (say Jan 2020), is the proper tax filing for them to pay fair market rent? I can of course gift them $ annually ($15k without gift tax return, higher with gift tax return and deduct life-time exemption ) to help.

[KrisD]

Yes, you seem to know what you're doing.

[Lily1]

Thx again TurboTaxKrisD! Sorry for one more followup 🙂

If I never collected rent for say 1.5-2 years (starting Jan 2018) but claim it as rental with carryover loss. Is it safe to 1031 into a rental property closer to me? (moved from CA to WA) I will hold the new property as rental for at least a couple of years of course.

[TaxGuyBill]

Until it is actually AVAILABLE for rent (advertised and renters can move in on that date), it is NOT a rental property.  There are no losses until that happens (as Kris said, the remodeling cost is added to Basis).

So if it is not rented and your family member moves it, it was never a rental.

[KrisD]

You might want to get additional professional advice on that one. As you probably know, Section 1031 can't be used on property held primarily for sale. There is also the Capital gains exclusion for primary residence, so you might want to take advantage of that instead of turning it into a rental.

[Lily1]

thanks TaxGuyBill, how would my case be different than the following...

Buy a property with intention to rent but first making necessary repairs to bring it up to acceptable condition prior to seeking renters. You seem to suggest the repair expenses prior to advertising for rent can not be claim as loss (only increase basis) even if the intention is foe rental.

Is this understanding correct?

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thanks to TurboTaxKrisD, house has over $700k cap gains and my exclusion is only $250k (single exclusive owner) Thus like to 1031 defer cap gains if possible. Also like to hold property until my passing (I'm 73 yo) to get stepped up basis and eliminate all depreciation recaptures.

[TaxGuyBill]

Yes.  It was your personal home and never available for rent, so it would never be a rental.

And if it was never a rental (and used to be used for personal use), it would not qualify for a 1031 exchange.