Deductible Expenses

[dman77]

I converted my own home to a rental in the middle of 2021 because I had to move. I was living in the property up until then. When renting was becoming a reality, I did a couple repairs to the home to prepare it for renting. I did a repair on the fireplace and replaced a bathroom faucet. Are these both deductible expenses? They were done while I was still living there, but not long before it was put up for rent. I would not have made these repairs if the property were not going up for rent. Would costs for hiring a cleaner after I had moved out and the property was available for rent be deductible expenses?

Also, is a water heater replacement (done a year or so prior) something that can be included for depreciation to increase the cost basis of the home?

Thank you!

[AnnetteB6]

The fireplace repair and the faucet repair are personal expenses and not deductible since you were still living in the property at the time.  If they had been done after you moved and made the property available for rent, then they would be deductible as a rental expense.

The cost of the cleaner is a deductible rental expense since it was done after you made the property available for rent.

The cost of the water heater should be added to the basis of the home since it was replaced prior to the property becoming a rental property.

[Carl]

Here's some details and clarification that most first time landlords find useful.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2^nd home before, then this date is the day AFTER you moved out, or the date you decided to lease the property – whichever is later.
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 was contracted to move in, and/or "could" have moved in. That would be your "in service" date or after if you were asked for that. Vacant periods between renters do not count for actual days rented. Please see IRS Publication927 page 17 at https://www.irs.gov/pub/irs-pdf/p527.pdf#en_US_2020_publink1000219175 Read the “Example” in the third column.
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, 2nd home, or any other personal use reasons 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 Improvement.

Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.

Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.

Expenses for these types of costs 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 need to 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 retain or 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.

There are rules that allow you to just flat-out expense and deduct some property improvements instead of capitalizing and depreciating them, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.

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 3^rd 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.

[dman77]

Thank you!  I'm not exactly sure where to add the Water heater cost in turbo tax to increase the cost basis. Would this get included under the "Any Property Improvements Made?" Section and added to the Remodeling total? Or would it go on a later screen under "Any other adjustments?"

[Carl]

Treat the water heater as an asset and enter it in the assets/depreciation section.  Note that water heaters are somewhat of a grey area. Technically, it's an appliance. But it's not like a stove that you can take out of the house by simply unplugging it.

A water heater becomes "a physical part of" the plumbing system, which is already "a physical part of" the structure. So with that analogy it gets classified as residential rental real estate and depreciated over 27.5 years.  Since it's somewhat of a grey area, I prefer to play it safe and treat it as residential rental real estate. 

Another thing you can do also, is just expense the cost of the water heater under safe harbor di-minimis if the cost is less than $2,500. Most likely it is. I know the last time I had to purchase a new water heater for one of my rentals a few years back, total cost including labor was around $800. Depreciating $800 over 27.5 years doesn't make one single penny of difference in my tax liability either. So I opted to expense it under safe harbor. Of course, doing that doesn't allow me to add to the cost basis of the property. But for $800, why bother?

[dman77]

Thanks so much for this info! Can I only deduct it under safe harbor de-minimus if I bought it in 2021? I bought it in 2019 before it was a rental.

[Carl]

I bought it in 2019 before it was a rental.

I forgot about that, as I didn't refresh my memory on this by re-reading this whole thread. Safe harbor is not an option then, unfortunately.

But why bother listing it separately? Include what you paid for it, in the cost basis of the entire property.  Any and all assets purchased before the property was converted to a rental, have the same exact in service date. So just include it in the cost basis of the property and be done with it. Makes life a whole lot easier and simpler in the future when you sell or otherwise dispose of the property.

[dman77]

Yeah, I understand that. Thanks. Would this get included under the "Any Property Improvements Made?" Section and added to the Remodeling total? Or would it go on a later screen under "Any other adjustments?".

Thanks again! Really helpful.

[Carl]

In the Assets/Depreciation section where the actual property itself is already entered. Elect to edit the property and add the cost of the water heater to the amount already shown in the COST box. Do not change the COST OF LAND box.

[dman77]

OK, perfect. Thanks. Would work I've done to replace the flooring and windows go in that same area? Or that would be under remodel?

[Carl]

Would work I've done to replace the flooring and windows go in that same area? Or that would be under remodel?

The "labor cost" for your physical work can not be assigned a value or claimed anywhere on any tax return. The cost of the materials for the flooring and new windows, as well as labor costs you paid to another to install those items  get included in the cost basis of the property as a whole, provided that work was done before you converted it to a rental.