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Level 1

Rental expenses

I'm unclear on where or not or how much rental expenses I can deduct. So I own a house near my college that I lived in until March. After March since COVID converted all of my classes to online I moved back home and the house sat empty. I had been planning to rent out the house after I graduated. Since it was unclear if we were going to go back to school in the fall or not I was unable to begin trying to rent it out yet incase I had to go back for fall semester. After finding out that fall would be online I started to get the house ready and will have renters moving in November 1st. My main question is about expense deductions I read that if you lived in the house for part of the year you split the expenses using worksheet 5-1. On worksheet 5-1 it asks total days available for rent but not rented, total days of rental use, and total days of personal use. When the house was completely unoccupied from april-september do those days count as personal use? Or are those days not counted at all? 

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Level 11
Level 11

Rental expenses

@Hclegg  from your post it sounds like you waited till the fall  sometime on October to advertise the house for rental  ( prepping during fall semester start ).  Thus the days available for rent is really the start of when you put the house for rent ( i.e. publicly put the house on rent, and actively seeking a renter )-- only you can stipulate when.   That is the start of your rental period.  So say you advertised on Oct 10th.  - by word of mouth or print or whatever, and your renter actually stared from Nov 1st then for 2020 tax year  your rental year started  from  Oct.10th  and rental income starts from Nov 1st.  The reasons you need these dates is   (a) for  satisfying  the personal use vs. rental use   to determine the status of the property  income vs. 2nd home  and (b) start and determination of depreciation of rental asset.

 

Expenses that are allowed to be deducted against  gross rental income are shown on Schedule-E  ( just download and take a look at both the form and instructions for the form ) but generally  it is all the expenses  necessary /usual associated with maintaining and owning the property such as  property taxes, mortgage interest, property insurance, repairs, legal expenses, HOA dues  etc. etc.  Improvements that increase the value of the property are part of the depreciation  schedule.

Pub 527  from www.irs.gov  is a very useful publication that goes into much more detail on this.

 

pk

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Level 11
Level 11

Rental expenses

@Hclegg  from your post it sounds like you waited till the fall  sometime on October to advertise the house for rental  ( prepping during fall semester start ).  Thus the days available for rent is really the start of when you put the house for rent ( i.e. publicly put the house on rent, and actively seeking a renter )-- only you can stipulate when.   That is the start of your rental period.  So say you advertised on Oct 10th.  - by word of mouth or print or whatever, and your renter actually stared from Nov 1st then for 2020 tax year  your rental year started  from  Oct.10th  and rental income starts from Nov 1st.  The reasons you need these dates is   (a) for  satisfying  the personal use vs. rental use   to determine the status of the property  income vs. 2nd home  and (b) start and determination of depreciation of rental asset.

 

Expenses that are allowed to be deducted against  gross rental income are shown on Schedule-E  ( just download and take a look at both the form and instructions for the form ) but generally  it is all the expenses  necessary /usual associated with maintaining and owning the property such as  property taxes, mortgage interest, property insurance, repairs, legal expenses, HOA dues  etc. etc.  Improvements that increase the value of the property are part of the depreciation  schedule.

Pub 527  from www.irs.gov  is a very useful publication that goes into much more detail on this.

 

pk

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Level 6

Rental expenses

The most important thing to understand is you only get to deduct operating expenses from 10/10 forward and  you had ZERO personal days of use once you put the house into service ... pay close attention to those instructions on the input screens.    Prorate the annual expenses like mortgage interest, insurance  and RE taxes yourself ... do NOT have the program do this for you in your situation. 

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Level 11
Level 11

Rental expenses

:@Hclegg Agreeing with @Critter-3  for an excellent point, I would also like to add the following:

 

1. If you plan to sell / dispose off the property  ( condo ? ), note that to avail yourself of gain exclusion ( $250,000  or single  or $500,000 for joint filers ) you must satisfy    (a) at least two years of ownership  and  (b) a total  of 760  full days of use as main home -- for each filer -- working backwards  from the sale date

2. Because it is a rented property, your basis in the property will remain as the sum of acquisition cost  and cost of any improvements till the date of sale. Your adjusted basis  is Sales proceeds  ( Sales price less sales expenses including transfer taxes  etc. ) LESS accumulated depreciation allowed. Thus your gain is Sales proceeds LESS adjusted basis. That part of the gain  that is caused by the  accumulated depreciation i.e. all gain upto  accumulated gain is treated  ordinary gain  and taxed at your marginal rate and the rest of the gain is capital gain and  is eligible for  exclusion if and only if you satisfy  the conditions  in item (1 ) above.

3, Give the above items it would be advisable to consult a tax professional before you sell so that you can minimize your tax hit. 

4. Till the  sale time , your rental income is reported on schedule -E  and  TurboTax would be quite capable of doing all this for you.  You just need to keep good records   ( all of these items are outlined  in Pub 527 as mentioned above )

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Level 15

Rental expenses

Here's a synopsis that should answer most, if not all your questions.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2nd home before, then this date is the day AFTER you moved out or any day after that if you later decided to rent it out instead of letting it sit empty.
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 “better” the property. Basically, they retain or 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 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, 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 3rd 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.

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Level 1

Rental expenses

Ok thanks this was a lot of help. My last question is about this "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."

So while I wasn't living in my house my neighbors were telling people that I wanted to rent it out. I went up to my house just to empty it out and hadn't yet planned on trying to find a renter however when I was there one of the people my neighbors told about the house knocked on the door to tell me they were interested in renting. I showed them the house even though it wasn't ready to be rented out yet. They loved it and wanted to move in asap. I still need to have the house cleaned, painted, landscaped, and some electrical repairs. Would these count as preparing the property for rent and not be deductible? Or is my house already classified as a rental and they are deductible?

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Level 6

Rental expenses

The costs to make it rentable are added to the cost basis ... but moving out your personal belongings is a non deductible personal expense. 

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