Tax implications of buying a rental at the very end of year?

[abarmot]

I closed on my first investment property on Dec 22, and had no expenses or rental income until January. Does this have any impact on my 2020 tax return? Should I do anything in TurboTax to reflect this purchase?

Thanks!

[DavidD66]

The closing date is not the important date, that is the date your property was made available for rent.  That is the date the property is placed in service.  If that was in December of 2020, it would trigger depreciation on the house (not the land).  Residential Real Estate uses a mid-year convention, so no matter when during the year you place the property in service, it will have a half year of depreciation expense for the year.  

So, if you placed the property in service in 2020, set it up in TurboTax.  If you didn't place the property in service until 2021, you don't have anything to do for 2020.

[abarmot]

Thanks! It was NOT ready for service in Dec. Related question then: I just realized that taxes and interest paid at closing are probably expenses, not part of basis, is that correct? If so then how can I deduct (and carryover) such expenses without setting up a property in TurboTax? TT is telling me to delete the property because I did not rent it out in 2020.

[Carl]

Basically for your 2020 taxes, you will not report anything on SCH E concerning this property. You won't be completing or filing a SCH E at all.

The only deductions you can claim for this on your 2020 tax return is mortgage interest and property taxes paid, and only if those items were actually paid in 2020. You will include the mortgage interest and property taxes paid in 2020 on the SCH A as an itemized deduction. (Include those items in the "your home" section under the deductions and credits tab)

More than likely you did not receive a 1098-mortgage interest statement on this property for 2020, since all of your prepaid interest was paid at the closing. So both the interest paid in 2020 and the property taxes paid in 2020 as shown on your closing statement are a SCH A deduction on your 2020 tax return. That's it.

[Carl]

how can I deduct (and carryover) such expenses without setting up a property in TurboTax?

You'll deal with this stuff on your 2021 return next year. Meanwhile, the absolute only thing you can claim on your 2020 return is mortgage interest and property taxes.... and they are a SCH A itemized deduction. All the other stuff you'll deal with next year, and there's no "carryover" from 2020 to deal with or worry about.

May I suggest you download a document I wrote based on my own personal experiences as a landlord over the last 30 years? It's at burchrentals.dynu.net/rentals/Rental%20Property%20Management.docx

You'll find it poorly written, but educational and entertaining.