I have a rental property, and I spent about $25000 to repair and remodel it, can I deduct this expense from my rental income, and how?

[KrisD15]

No, there is no limit, but improvements made before the rental was available for rent, are added to the basis of the building. Once the rental is available for rent, the improvements can be depreciated separately or even subject for the Section 179 deduction and/or Bonus Depreciation. 

If before, add the cost of improvements to the cost of the building. Also be sure to value the land, that amount is never depreciated. 

After it is an active rental, expense maintenance fees and list the improvements as additional assets. Each asset then is depreciated by its respective life. 

According to the IRS:

"The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year."

IRS Pub 527

[wigray06]

Hello, 

What if the expenses were incurred in 2019, but the property was not ready to rent until January of 2020?  Can I claim that on my 2019 taxes? 

[AmyC]

@wigray06 No, expenses before rental are added to the basis for depreciating the property. It was first used in 2020. You will enter the increased basis into the depreciation section on your 2020 return.

The IRS says that the property must be held out for rent for expenses to be taken. Here are the full rules from the IRS for Rental Income and Expenses.

Related:

• Instructions for Schedule E (Form 1040)
• IRS Pub 527 for Rental Property
• What kinds of rental property expenses can I deduct?
• What is rental depreciation and how does it differ from an expense?
• How do I handle capital improvements and depreciation for my rental?
• Can I claim a security deposit?

The IRS also has an interactive tax assistant tool to help with determining expenses.  

IRS ITA for rental expenses.

[BobWattsi]

What if you have a rental property that has been profitable for 35 years but needs 25,000+ worth of work

in order to continue to rent it or sell it.  Can 25K if expenses be deducted while renovating the property if you earn less than 100K of other income. How long can expenses be deducted during the renovation while not earning any income from the property.(How long can I take to do the renovation) I am guessing you can only deduct expenses if you continue to rent the property.

If it is sold rather than rented, are all of the expenses of renovation added to the basis?

[ErnieS0]

@BobWattsi There is a special allowance for rental real estate activities that allows landlords who actively participated in their real estate activity to deduct up to $25,000 in rental losses. The allowable amount phases out between $100,000 and $150,000.

There is no limit to the amount of qualified rental expenses you can deduct, except when the expenses put you in the loss limitation situation. Any losses in excess of the allowable amount are suspended and will offset future profit. Any unused losses can be deducted in the year of sale.

The IRS uses a calendar year so a renovation can last more than one tax year. However, you will only be able to deduct expenses in the year actually paid.

Not actively rented. If you are not renting a property while under renovation, then you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you can’t deduct any loss of rental income for the period the property is vacant.

If the property isn’t held out and available for rent while listed for sale, the expenses aren’t deductible rental expenses. Those expenses would be added to the basis.

Repairs versus improvements. You can deduct repairs, but must capitalize (spread the deduction over years) of an improvement. Repairs are any expenses of maintaining a property in its present condition. Improvements are expenses which result in a betterment of your property including expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.

For more on rentals see IRS Publication 527.

[grazer]

We have rental, tenants moved out, then spent 50k refurbishing it. in TurboTax, after adding asset and stating yes to improvements, decline improvements as expenses, and describe the remodel as Rental Real Estate Property,  We think this is correct? How do we then categorize it? As Residential Rental Real Estate? By selecting that we then enter  <property address> "remodel" and supply the costs, finish date, etc., purchased as new, etc. Is this correct?

Thanks,

[AnnetteB6]

Yes, you are on the right track with entering your remodel expenses as a depreciable asset.  Using the Residential Rental Real Estate category will depreciate the total cost over 27.5 years.

@grazer

[soccer9542]

I'm in a similar situation.  Did most of the work myself so the total cost was around 15k.  Can I split the renovation into categories and depreciate over shorter periods of time depending on the category?

Like 5 years for Carpets, Appliances, etc.  If so, is there a list somewhere showing the depreciation schedule for different items?

Thanks,

Chris

[gloriah5200]

@soccer9542

If the jobs were one large repair/improvement job vs several separate repairs or improvements is what  you would look at to determine if it was one large job or several smaller jobs that could be depreciated over different class lives.

Repairs are deductible in current year vs improvements are depreciable over qualifying class life.

Refer to the following IRS Publication 946 for additional information on depreciation:

IRS Publication 946, Depreciation

Refer to the following IRS publication 547 on Residential Rental Property:

IRS Publication 527, Residential Rental Property

[soccer9542]

I did most work as one big project during a turnover between tenants. 

So just because of that I have to depreciate the carpets and appliances over 27.5 years instead of 5?   

Thanks,

Chris

[brianm2]

I sold my rental property in 2020 after owning it for 15 years. Before selling, I spent about 45K on a major rehab. How do I add the cost of the improvement to the basis so that it's not counted toward capital gain? I tried adding the rehab as a new asset to the property, but TT is showing a very large capital gain that doesn't seem right. I feel like the capital gain should be reduced by the amount I spent on the improvement, but that doesn't seem to be the case. 

Thanks for any help on this. 

[Irene2805]

If any of the individual improvements were $2,500 or less you can deduct them as expenses rather than depreciating them over a number of years.  This is the de minimis safe harbor election.

This election for items $2,500 or less is called the De Minimis Safe Harbor Election. This election is an option you can take each year that lets you write off items $2,500 or less as expenses instead of assets. Expenses typically reduce your income by a larger amount than depreciating an asset over multiple years does. This means you could get a bigger refund.

If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

Here are the rules you need to meet to take this election:

• You don't have an applicable financial statement (most people don't).
• You have a consistent process for how you record expenses and assets.
• You record these items as expenses on your books/records.
• The cost of each item as shown on your receipt is $2,500 or less.

To make either of the elections please follow these steps:

TURBOTAX CD/DOWNLOAD

Part 1.  Make the election

1. Click on Federal  > Wages & Income [In TT Self-Employed:  Business > Continue > I'll choose what to work on]
2. In the Rental Properties and Royalties section, click the Start/Revisit button.  
3. If you have already started adding information about your business, you will be asked if you want to review your rental and royalty information.  Click the Yes box. 
4. When you come to the Rental and Royalty Summary screen.  Click on the Edit box next to the property.   
5. If you haven't already started adding information about the property, continue through the screens to enter the needed information.
6. You will now be on the Review Your [property name] Rental Summary screen.  
7. In the Assets/Depreciation section, click on the Start/Update box.
8. If you’ve already entered some assets, you will see the screen, Do you want to go directly to your asset summary?  Mark the No box and click Continue.
9. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2019? mark the Yes button and click Continue.
10. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue.  .
11. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less.
12. If you mark that every item cost $2,500 or less, you will be brought to the Rental Summary screen.  You have elected the De Minimis Safe Harbor provision.  Proceed with Step 2, below.
13. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2020?
    • If you say Yes, you will be taken through the screens for the Improvements election. 
    • If you say No, you will see the screen Do you have any items that aren't covered by your elections?  Proceed through the screens to enter these assets.

Step 2.  Enter your election-related items as other expenses.

1. On the Rental Summary screen go to the Expenses section and click on the Start/Update box. Click I'll choose what I work on. 
2. Continue to the Any Other Expenses? screen and enter the description and amount paid for the assets. Click Continue when finished. 

TURBOTAX ONLINE

Part 1.  Make the election

1. On the Wages & Income screen.
2. In the Rentals, Royalties, and Farm section, click the Start/Revisit button for Rental Properties.  
3. If you have already started adding information about your business, you will be asked if you want to review your rental and royalty information.  Click the Yes box. 
4. When you come to the Rental and Royalty Summary screen.  Click on the Edit box next to the property.   
5. If you haven't already started adding information about the property, continue through the screens to enter the needed information.
6. You will now be on the Here's XX rental property info screen.  
7. In the Assets section, click on the Add expense or asset box.
8. If you’ve already entered some assets, you will see the screen, Do you want to go directly to your asset summary?  Mark the No box and click Continue.
9. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2020? mark the Yes button and click Continue.
10. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue.
11. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less.
12. If you mark that every item cost $2,500 or less, you will be brought to the Rental Summary screen.  You have elected the De Minimis Safe Harbor provision.  Proceed with Step 2, below.
13. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2020?
    • If you say Yes, you will be taken through the screens for the Improvements election. 
    • If you say No, you will see the screen Do you have any items that aren't covered by your elections?  Proceed through the screens to enter these assets.

Step 2.  Enter your election-related items as other expenses.

1. On the Here's XX rental property info screen go to the Expenses section and click on the Add Expense or Asset box.
2. Mark the appropriate box under Expenses (repairs, for example) and click Continue.
3. On the screen, Tell us a bit more about the repairs you selected, mark the radio button It’s a repair (expense) and click Continue
4. You will be brought back to the Here's XX rental property info screen to enter the expenses.

For more information, see this IRS article:  Tangible Property Regulations - Frequently Asked Questions

@soccer9542

[Irene2805]

First enter the improvements as an asset in TurboTax.  The cost you enter becomes the basis of that asset.  You then allocate a portion of the total sales price to that asset.

@brianm2

[brianm2]

Thank you, that was a big help!

[mkschool]

i did not get the screen asking me about if this was the year i purchsed the house? where I could enter amount... then it asks me about improvements--- as you say. 

-Matt