Rental Asset

[navaroy]

How should redoing kitchen countertops,  changing floor from carpet to vinyl etc categorized be under rental asset? Would it be under Depreciations - Assets - Improvement - under the Rental Estate Property category or the - Appliances, carpet, furnishing category? Thank you.

[DianeW777]

It depends. The countertops and flooring in a complete remodel should be considered as capital improvements. You have two options on how to deduct the expenses if you qualify. Depreciation as a 'residential rental property' which is the same as the original rental property; or you may qualify for the Safe Harbor Election for Small Taxpayers. 

Safe Harbor Election for Small Taxpayers may be used:

• What can I depreciate or expense with the business safe harbor method?
• How do I handle capital improvements and depreciation for my rental?

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

• Your gross receipts, including all your other income, are $10,000,000 or less.
• Your eligible building has an unadjusted basis of $1,000,000 or less.
• The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits:
  • 2% of the unadjusted basis of your building or
  • $10,000

 If you find you do qualify for this option and you want to take the full expense in one year for capital improvements, use the steps below to enter it in your return. 

1. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2025? mark the Yes button and click Continue.
2. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue.
3. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less.
4. 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.
5. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2025?
6. If you say Yes, you will be taken through the screens for the Improvements election.
7. 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.
8. On the Rental Summary screen go to the Expenses section and click on the Start/Update box.
9. Continue to the Miscellaneous Expenses? screen and enter the description and amount paid for the assets. Click Continue when finished.

[navaroy]

Diane,

Thank you for the detailed response.  We will list the expenses as assets under Depreciation "residential rental property. 
Regards,

vino

[navaroy]

Thank you. Please could you also advise where we should list all the Closing Costs for Sale of Rental Property that can generate form 4562? Thank you.

Nava

[MindyB]

To clarify, Form 4562 is used to report depreciation and amortization.

For a rental property sale, most closing costs, such as legal fees, title insurance, and transfer taxes, will reduce your gain on Form 4797. 

When you sell your rental property, follow the steps to report the sale found here: I sold my rental property. How do I report that?, with the selling expenses you asked about being reported in step 10:

"To report the sale of your rental property, follow the steps below:

1. Go to the rentals section
2. Answer Yes to the question Did you have any income from rentals or royalties?
3. On the Your rentals and royalties summary page, select Edit (pencil icon) beside the property you sold.
4. Select Edit (pencil icon) next to Rental property info.
5. Under General info, select Edit under Situations (or on the page Tell us about your situation this year), then select Sold or disposed of property. 
6. Continue through the screens until you return to the Here's your rental property info screen.
7. Select Edit next to Sold rental property or Sale of property/depreciation.
8. Go directly to your asset summary and select Edit beside the first rental asset you sold.
9. Continue to the page Tell Us More About This Rental Asset and check the box for The item was sold... Enter the date of the sale in the pop-up box.
10. Follow the prompts to enter the sale information, including the sales price and selling expenses you calculated.
11. Continue back to the Rental Asset list.
12. Repeat steps 9-11 for each rental asset.
13. Continue back to the Property Summary page. Select Done/Continue and answer any follow-up questions."