Owned rental home for 10 years (tenant destroyed it) It has taken 1yr to repair it

[ilovemy5children]

only received $2100 for last year. We bought home 15 years ago for 109,000. We added an edition on for approx $13000. between March and December  We spent about $15000 for repairs. December to present $35,000 for repairs. We were unable to rent during those months

[Opus 17]

As long as the home is available for rent (not converted to personal use) you can report your expenses.  I'm not sure the effect of showing a loss, @Carl is one of the experts on rentals.

You will need to distinguish between repairs and improvements, because repairs can be deducted in the year they are paid, but improvements must be depreciated over 27.5 years.  A repair restores the property to as-was condition.  An improvement, also referred to as a "betterment", increases the value of the property or extends the working life of the property or one of its subsystems.  Classic examples of improvements would be replacing carpeting or flooring, replacing the furnace, or adding an addition.  Painting is usually a repair, but the cost of painting the addition would be included in the cost of that improvement.  Replacing carpeting in one room that was damaged might be a repair instead of an improvement.  If you replace appliances they are also depreciated under a different time frame.

For repairs and improvements, you only deduct or depreciate the amount of money you actually spend for supplies and labor, you can't include anything for the value of your own or other unpaid labor. 

[tagteam · Accepted solution]

Refer to the following section of the relevant IRS publication in order to make the distinction between an improvement and a repair. Note that an addition would almost certainly be considered an improvement that must be capitalized.

https://www.irs.gov/publications/p527#en_US_2019_publink1000219015

With respect to losses from rental real estate activities. to the extent losses exceed income from other passive activities, the loss is disallowed.

However, there are exceptions for real estate professionals who materially participate in their rental activities and there is also a $25,000 special (loss) allowance (subject to limitations) if you or your spouse actively participated in the rental activity.

See https://www.irs.gov/publications/p527#en_US_2019_publink1000219124

[Opus 17]

---

@tagteam wrote:

Refer to the following section of the relevant IRS publication in order to make the distinction between an improvement and a repair. Note that an addition would almost certainly be considered an improvement that must be capitalized.

https://www.irs.gov/publications/p527#en_US_2019_publink1000219015

With respect to losses from rental real estate activities. to the extent losses exceed income from other passive activities, the loss is disallowed.

However, there are exceptions for real estate professionals who materially participate in their rental activities and there is also a $25,000 special (loss) allowance (subject to limitations) if you or your spouse actively participated in the rental activity.

See https://www.irs.gov/publications/p527#en_US_2019_publink1000219124

---

Additionally, you may be able to "capitalize" your losses.  That is, to treat your repair expenses as if they were capital expenses subject to depreciation.  Why would you do this?  For example:

Suppose that for your 2019 return, you spent $13,000 for capital improvements and $15,000 for repairs, against $2100 of income.  And suppose you don't qualify for the special loss deduction.  You would depreciate the capital improvement over 27.5 years, meaning you deduct $472 in 2019.***  You deduct the $15,000 repair expense, for total deduction of $15,472.  But your deduction is limited to $2100, so you lose the remaining deduction forever.  

So instead, you elect to treat the $15,000 of repair expense as a capital expense.  This requires including a written explanation with your 2019 tax return so you can't e-file.  You now have $28,000 of capital improvements that you deduct over 27.5 years, meaning you deduct $1018 this year.  The deduction is allowed since it is less than your income.  It is better in the long run to deduct the repairs over 27 years than not deduct them at all.

A similar thing could be done to capitalize any of the $35,000 of expenses from 2020, and deduct the expenses over 27 years, depending on how much rental income you actually obtain in 2020 once the property is back on the market.

Note that this only applies if you re-rent the property.  If you convert it to personal use or sell it, you can't do that. 

And, even if you qualify for the special $25,000 loss, you may want to capitalize the remainder of your repair expenses so you eventually benefit from them.

I suggest the services of a qualified accountant to help you navigate this issue.

[tagteam]

---

@Opus 17 wrote:
And, even if you qualify for the special $25,000 loss, you may want to capitalize the remainder of your repair expenses so you eventually benefit from them.

---

I suppose I should have mentioned that any unused (disallowed) losses from the rental activity will be carried forward to the following tax year (and subsequent tax years if the losses remain suspended).

The suspended passive activity losses (PALs) will ultimately be released upon a sale to an unrelated third party in a fully taxable transaction.

[Opus 17]

---

@tagteam wrote:

---

@Opus 17 wrote:
And, even if you qualify for the special $25,000 loss, you may want to capitalize the remainder of your repair expenses so you eventually benefit from them.

---

I suppose I should have mentioned that any unused (disallowed) losses from the rental activity will be carried forward to the following tax year (and subsequent tax years if the losses remain suspended).

The suspended passive activity losses (PALs) will ultimately be released upon a sale to an unrelated third party in a fully taxable transaction.

---

Thanks.  This is admittedly not my usual area of taxes and your use of the word "disallowed" instead of "suspended" sent me down the wrong path.  Still, there might be advantages to capitalizing the costs rather than suspending them, depending on how long the taxpayers plan to own the property and use it as a rental, and depending on other rental income and expenses.  An accountant may still be of benefit. 

[tagteam]

---

@Opus 17 wrote:
........there might be advantages to capitalizing the costs rather than suspending them, depending on how long the taxpayers plan to own the property and use it as a rental, and depending on other rental income and expenses.......

---

I agree, but would continue to be hesitant about transforming a large amount of otherwise deductible expenses (even if suspended until such time as they could be released) into what is essentially a capital asset and, thus, subject to cost recovery/recapture at the time of disposition.

If it is possible for @ilovemy5children to consult with a tax professional, I agree that would be a wise decision (not all accountants are tax professionals, obviously).

[Anonymous]

before you file your return, did you have insurance to cover this type of loss?  if you did, did you file a claim?  did you sue the tenant?  What I'm getting at is that the IRS can deny the deduction for losses that are recoverable even if the taxpayer decides not to seek recovery. An exception to this is if the attempt to recover would be fruitless or cost more than is recoverable. 

[Carl]

only received $2100 for last year.

Doesn't matter if you received ZERO rental income for the year. So long as the property was classified as a rental, you still report on SCH E. Even if it's ZERO income.

We bought home 15 years ago for 109,000. We added an edition on for approx $13000. between March and December

If by "addition" you mean you added on to the house, thus increasing the floor space, that's a property improvement. The cost is added to your cost basis and depreciated over 27.5 years. Depreciation starts on the date the addition was placed "in service" - not necessarily the date construction was completed. Your "in service" date for the property improvement is the first day it was "available for use". To put it another way, it's the first day a renter "COULD" have moved in once construction was completed. Doesn't matter if it took you three months to actually get a renter in their either.

We spent about $15000 for repairs.

While not impossible, I seriously doubt you spent $15K on "REPAIRS". Most, if not all of that was most likely property improvements.  Here's the difference.

REPAIR - Cost incurred to return an asset to the same usable condition it was in prior to the event that caused the asset to no longer be usable for it's designed and/or intended purpose. Examples would be something like replacing carpet that was damaged due to flooding.

Property Improvement - Cost incurred to "better" or improve an asset, increase the life span of an asset, and/or increase the value of that asset.  An example would be replacing carpet that was just flat out old and worn out, and not really usable any longer.

December to present $35,000 for repairs. We were unable to rent during those months

Again, I think you're mixing repairs with property improvements with that number of $35K. The difference is already explained. The fact you could not and/or did not rent during those months does not change the fact that the property remains classified as residential rental real estate.... *PROVIDED* you did not live in the property for one single day as your primary residence, 2nd home, vacation home or any other "personal pleasure" type of use. As an example, if you lived in the home for a month for the *PRIMARY* purpose of doing the work needed yourself, or assisting/supervising a contractor you hired to do the work, that is not any type of personal pleasure use. Therefore, there is no need to convert "anything" to personal use, thus stopping depreciation during that time.

Now understand that if you elect to convert to personal use and stop depreciation, then the TurboTax program flat out can NOT deal with the depreciation math *correctly* when you convert it back to rental property. So if you're going to do that, then you not only can not use TurboTax when you convert back to a rental, you also can not deduct "ANY" repair, maintenance or utility expenses incurred during the time the property was "NOT" classified as a rental.

Overall, with your reference of "December to present" I am assuming that is December 2019 to some time in the "present" 2020 tax year. Therefore you will only be able to deduct repair/maintenance expenses actually incurred in 2019, on your 2019 tax return, provided you actually paid the expense in 2019. (I assume you operate on a cash basis, since more than 90% of landlords do.)

Since your property improvement was not completed and "available for rent" in 2019, you will *NOT* enter a single thing concerning the property improvement in the assets/depreciation section on your 2019 tax return. You'll deal with that on the 2020 tax return which you will complete next year in 2021.

If you need more detailed assistance, then you'll need to provide a more detailed explanation of just what was done, and when (which tax year) you paid for it. I've done the best I can with my understanding and interpretation of what's been provided.

[mellish7777]

REPAIR - Cost incurred to return an asset to the same usable condition it was in prior to the event that caused the asset to no longer be usable for it's designed and/or intended purpose.

That's not what the IRS Pub says:

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.

 (I assume you operate on a cash basis, since more than 90% of landlords do.)

Curious as to how YOU know what 90% of landlords do.

While not impossible, I seriously doubt you spent $15K on "REPAIRS".

Curious as to how YOU are in a position to doubt what anyone claims to have spent on anything.