Claim deduction on a rental property

[yosemite798]

I have a rental property (single family house) in California.  

The house is under my name (inherited from my dad). 

I am a resident of Texas, I plan to file a joint return with my wife for 2022. 

The house was occupied by one tenant from 1/01/2022 to 6/18/2022. Tenant rented one room, he use guest bathroom and the kitchen area. 

1. After the tenant moved out, I spent about $25,000 to renovate the house. I lived on the property about 4 month to monitor the renovation process. I am wondering if I can claim the renovation cost as a deduction on our 2022 joiny tax return?

 1a. In csse $25,000.00 can not be used for deduction in 2022, Will I able to use it for tax deduction when I plan to sell the rental property?

2. After the renovation, I hired a property management company to help me manage the rental property. They charged me $517.00 for making keys and minor repair work. Can I claim $517.00 for deduction purpose?

 Your input/advise is grealy appreciated. 

[MarilynG1 · Accepted solution]

If you inherited the house from your dad, your 'basis' in the house is the Full Market Value of the house when you got it (this is the amount you use as Cost Basis when you set up the house as an Asset in TurboTax). 

(1) Depends.  You could add another Rental Asset of 25K in the rental section.  That way the improvements will be depreciated along with house itself.  Or, you may be able to claim it as an expense if you qualify.   TurboTax will give you the options (see screenshot in link below). 

   (1a)  When you sell you don't use the 25K as a deduction.  The remaining basis in both the house and the improvements (if you chose to depreciate them) will be your Cost Basis for determining Gain/Loss on the sale. 

(2) Yes, you can claim expenses you paid the Property Manager as Rental Expenses. 

Here's detailed info about Adding Improvements to a Rental Property with screenshots you will find helpful. 

[yosemite798]

Hello MarilynG1, 

 Thanks answering my quesions. 

 I have some additonal questions regarding deduction: 

 In order to make the house avaible for rent, I hired a moving company to help me pack up the staff and shiping them back to Texas. 

 Can I claim the shipping cost $8200 and labor cost $1540 (pack up the staff and move them into the containers) as an expenses on my 2022 tax return? 

[PatriciaV · Accepted solution]

Yes, costs incurred to maintain a rental property can be reported as rental expenses as long as the property was available to be rented during this period. The activity you described did not increase the value of the rental property, so those costs would not be capitalized (added to the basis).

[Carl · Accepted solution]

1. After the tenant moved out, I spent about $25,000 to renovate the house.

Those are property improvements. They are not "deducted" per-se. They get capitalized and depreciated over time, with depreciation starting on the date that property improvement is placed in service and is "available for rent."

I lived on the property about 4 month to monitor the renovation process.

I would assume your "primary" reason for living there, was for the renovation process. Your primary residence in TX did not change. That being the case, there's no problem with the property remaining classified as a rental during that time.

I am wondering if I can claim the renovation cost as a deduction on our 2022 joiny tax return?

Not "directly" as a deduction. If the property was "available for rent" in 2022 after the renovations were done, then those costs get entered in the Assets/Depreciation section and depreciation starts on the date the asset was placed "in service". Generally, an asset is considered in service on the first day a renter "could" have moved in.

After the renovation, I hired a property management company to help me manage the rental property. They charged me $517.00 for making keys and minor repair work. Can I claim $517.00 for deduction purpose?

Yes. those charges for keys and minor repair work would be a valid repair expense claimed as such on the SCH E. You'll also see there's a box in the rental expenses section for management fees. Whatever the management company charges you for managing the property, is what you would enter there.

You need to communicate with your management company on how they're going to report things at tax time. it "will" matter, and it will affect how you maintain your own records for tax time. The two most common ways are:

 - Tenant pays the management company the rent. Management withholds their management fee and the cost of any repairs, maintenance and/or any other costs beyond management fees and sends you the remainder. Management company issues you a 1099-MISC showing "ONLY" the amount they sent to you. It does not include what was paid for management, repairs, maintenance and other rental expenses. In this scenario, your only deductions would be depreciation, mortgage interest, property taxes and property insurance.

 - Tenant pays the rent (to either you directly or the management company) and the management company sends you a 1099-MISC for the total of all rents collected. In that case, you would be able to deduct all valid rental expenses. Just make sure the management company provides you a detailed breakdown of what they spent, when they paid for it, and why. You'll need it.

With either of the above two methods (there are other methods) the management company would be required to issue you a 1099-MISC at tax time. You would *not* be required to issue one to them. 

Remember the golden rules when dealing with the IRS and taxes.

1 - You are guilty until proven innocent.

2 - The burden of proof is on the accused (that would be you.) and not the accuser.

3 - If it's not in writing, then it *did* *not* *occur*. (and you can scream and holler all you want.)