Repair/Improvement expenses from last year did not happen yet

[JustAnother]

My tenant moved out in late 2019, so in Dec 2019 I paid a contractor $5,500 of a $9,000 quote for repairs (painting) and Improvements (Flooring, bathroom redone, etc).

I reported the $5,500 as all "Repairs" for 2019 Tax  using TT.

The work is still pending due to delays by the contractor, myself, covid etc.

Questions: 

1) As I do my 2020 taxes with no rental income, how can I claim/report/handle the $5,500 I paid in Dec 2019 as all "Repairs" even though the quote of $9,000 was for a mix of repairs / improvements?

2) Do I 're-categorize' the $5,500 in my 2019 taxes? 

[AnnetteB6]

The amount you paid in 2019 has already been claimed on your 2019 return as a repair cost.  That may be correct since you said it was for a mixture of repairs and improvements.  Only you and the contractor know how the total should be broken down between repairs and improvements.

If it was paid for an improvement instead of a repair, then you would need to amend your 2019 return to remove that deduction from your 2019 return.  The cost of the improvement will be entered on the tax return when the final payment is made and the improvement is complete and placed in service in the rental property.  

If there was nothing paid in 2020 with regard to the repairs/improvements you are paying the contractor, then there is nothing to enter on your 2020 return with regard to those costs.  Once the work is complete and you make your final payment, you will enter that amount on that year's tax return, either as a repair or improvement depending on the nature of the work you are paying for.

[JustAnother]

Thanks

In general how does a "Repair" work for you vs an "Improvement" tax wise?

For example a "tax deduction" reduces your taxable income, and "tax credit" reduces the amount of tax you owe directly.

So for Repair vs Improvement, how does each benefit you? Which is 'better'?

[Carl]

The cost of repairs are claimed reported in the tax year they are actually paid. Doesn't matter when the work was done. Property improvements (defined below) are a different matter.

Property improvements are entered in the tax year the property was placed "in service" as a rental asset. It does not matter n what tax year the improvement was done, or paid for.

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 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.