Deduction of HOA fees on a rental property

[Carl]

No. Your HOA fees do not become a deductible rental expense until the property is placed "in service" and is available for rent. Generally, this is the day you put the "FOR RENT" sign in the front yard. But to be more specific, the property is not considered to be in service until the first day a renter "could" move in. So if you've got major renovations going on right now, there's no way possible a renter could move in today.

Additionally, any and all utilities costs incurred (electric, water, etc.) before the property is placed in service is "not" a rental expense either. You can add those costs to the renovation costs since the contractors need electric and water to do their work. But I don't recommend you do that. Just pay it "out of pocket" and don't worry about it.

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.
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 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 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.

[ddubs82]

@Carl Can't Cleaning and maintenance expenses incurred in the process of preparing the property for rent be classified as "Start-up Expenses"?  Given if this was once a private residence and is now being rented for first time?  I was told this on another post.  

[Carl]

@ddubs82 there's no such thing as start up expenses for rental property reported on SCH E. There's absolutely no provision for it anywhere in IRS Publication 527. Expenses incurred when preparing the property for rent for the very first time are not deductible, and never have been. You can't start deducting expenses until after the property is move in ready and basically "available for rent".  Now do not confuse this with property improvements, as property improvements are their own completely separate thing.

[ddubs82]

@Carl  This is not what I am being told in the following post  https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/re-rental-income-expe... from @DianeW777.

[Carl]

You're being told in a way that easily causes an incorrect interpretation on your part. Nowhere in IRS publication 527 will you even find the phrase "start up expenses". Keep in mind that just because someone may be a TTX employee, doesn't automatically make them right, or an authority on any given subject. I've been a landlord for 30 plus years now, and can tell you for a fact that start up expenses are flat out not allowed on SCH E rental property, and they never have been for the entire 30 plus years I've been involved in residential rental real estate.

[Anonymous_]

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@ddubs82 wrote:

This is not what I am being told in the following post  https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/re-rental-income-expe... 

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@ddubs82:

Section 195 controls here. See https://www.law.cornell.edu/uscode/text/26/195

Note the repeated references to "active trade or business" which would not be applicable to your residential rental property.

[Carl]

Just to reiterate, the typical long term residential rental property does not qualify as an active trade or business. But can it? Yes. However, for a vast majority of landlords, their property does not qualify as such.

[Anonymous_]

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@Carl wrote:

....the typical long term residential rental property does not qualify as an active trade or business. But can it? Yes. 

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No, long-term residential rental property cannot qualify as an active trade or business unless the owner thereof happens to be a real estate dealer (i.e., someone who is in the business of buying and selling real estate for a profit, regularly and consistently, to the extent that the real estate is treated as inventory).

[JotikaT2]

Cleaning and mantenance expenses incurred while getting the property ready for rent would be deductible as a rental expense.  There are no start up costs since the IRS allows you to deduct costs if the intention is to rent the property.

Please see this link for more information.

@ddubs82 

[taxmodern]

Ok, lots of incorrect information in every reply on this post to correct.  The earlier response that said that costs before a property are placed in service can't be deducted anywhere is incorrect. The response that said "there are no start up costs since the IRS allows you to deduct costs if the intention is to rent the property" is also not correct.  The reply that said rentals don't qualify as a trade or business is also not correct (usually).

Costs before a rental property is placed in service can be added to the cost basis of the property that you depreciate.  You can just add the costs to the building cost basis, or enter them as a separate depreciation item.  The start date of the depreciation would be the placed in service date.  You cannot just deduct expenses from before the placed in service date as regular expenses.

The costs that you can add to the depreciation basis include mortgage interest and real estate taxes while you were getting it ready to be rented, travel expenses to go work on the property, utilities, pest control, and regular maintenance costs. 

If anyone wants tax code references for this, see § 263 and § 1.263(a)-2(d). 

Section 195 startup expenses

The short answer, is yes, rentals typically do qualify for Section 195 startup expenses.   You can optionally choose to use section 195 for some types of startup expenses for rentals rather than adding those costs to the basis.  Section 195 specifically doesn’t allow mortgage interest or property taxes, those costs must instead be capitalized.  But other expenses may be deducted as startup expenses.  But you have to be aware of all the nuances of the section 195, including what happens if your startup expenses are over $5000.

There was a discussion about whether a rental is a "trade or business".  Most residential rentals are a section 162 trade or business.  As Mercado v. United States says  “Courts have consistently held that the rental of real estate is a "trade or business" if the taxpayer-lessor engages in regular and continuous activity in relation to the property. It has been held that a taxpayer who rents only a single parcel of real estate is engaged in the "trade or business" of renting real estate if his activities are regular and continuous. The fact that the plaintiffs employed agents to manage the real property does not make any difference.”  Aside from that, there's an argument that section 195 also applies to § 212 Investment activities anyway.

Here are some court cases that confirm you can use section 195 startup expenses for rentals:

- Charlton v. Commissioner, 114 T.C. 333, 338 (2000)  - Says their rental cabins aren't deductible yet but qualify for section 195 startup expenses.

- McPartland v. Commissioner, T.C. Sum. Op. 2012-88.  Regarding rental expenses before a property is placed in service. "Startup expenditures, although not currently deductible, may generally be deducted over time pursuant to section 195."