Rental expenses

[LDS60]

I purchased a home in 2023 to use part-time as a residence and part-time to rent out. I made some major renovations in 2023 and purchases to get it ready to rent,  but did not start renting it out until 2024. The accountant I was using at the time, said I could not deduct those on my 2023 tax return since it wasn't rented that year and implied that I would be able to deduct those in 2024. Unfortunately, she passed away so I can ask her what the plan was for 2024. Are any of the expenses that were paid out in 2023 deducible on my 2024 taxes? If so, where? Or should they have been deducted in 2023? If not deductible will they just be applied to my cost basis when I sell?

[KrisD15]

She was correct that the expenses could not be claimed in 2023 since the property was not "placed in service", it was not available to rent. 

For Tax Year 2024, if the property was available to be rented, (does not mean you HAD a tenant, just that you were ready for one) you can claim the expenses PAID in 2024. 
The expenses you paid in 2023 are added to the basis. So if you paid 200,000 for the home and paid 10,000 for updates and repairs, the basis/your cost for the property is 210,000. 

This is the number used as your basis for depreciation (although you do need to split the original cost between building and land first)

For example, if the purchase was 200,000 and the building was worth 185,000 and the land was worth 15,000, for the rental you would enter 15,000 for the land and you would enter 195,000 for the building. 

Land does not depreciate, the building does, so each year you will have a little depreciation subtracted from your rental income. 

You have no choice but to claim depreciation. 

Once you sell, the inflated basis (210,000) will be used to compute capital gain but you will also be subject to "Depreciation Recapture" which is claiming any depreciation that was paid back. 

Example-

Purchased 200,000

Added 10,000

Depreciated 3,800  over 5 years

Sold 225,000

You would have 15,000 capital gain and 3,800 depreciation recapture.

Depreciation recapture is taxed at your personal income rate. 

IRS Pub 527

[LDS60]

Thank you for your response. So do I put the cost basis in the 'assets and depreciaton' section on TT where it asks what I paid for the house? Do I add the remodeling expenses directly to what I paid for the house?  Is there anywhere to put expenses for furniture and supplies that were purchased in 2023? I rent out mid-term furnished rooms and supply the furniture, linens, dishes, etc. Most of this was purchased in 2023 to get it ready to rent in 2024. 

[DianeW777]

Yes, you enter the amount you paid for the house, including purchase expenses from the settlement statement as a depreciable asset. Be sure to separate building and land. You can use the tax assessment from the city or county to arrive at the percentage for both. As indicated enter the full cost with capital improvements for the asset (includes land) and then enter only the land portion when asked.

• Note: The number of days used for personal and for rental will be used to calculated the allowable expenses.

For the furniture, linens, dishes, etc you can use startup expenses since they were purchased before the house was available to rent and in 2023.

Utilities, Insurance, etc: Costs you incur before you are actually in business of a rental activity are called start-up expenses. Special tax rules govern the deduction of these costs. Any expense that would be deductible as an operating expense by an ongoing business is a start-up expense when it’s incurred before a business begins.

Start-up Expenses: You can deduct up to $5,000 in these expenses the first year your rental is available for rent. For the past several years this limit has been $5,000. You’ll have to deduct any additional start-up expenses in excess of the first year limit in equal amounts over the first 180 months (15 years) you’re in business. This is referred to as an amortization deduction and is similar to depreciation but somewhat different.  TurboTax will help you with this deduction. 

• Startup Business Tax Tips 
• Where do I enter income and expenses from a rental property?

@LDS60 

[LDS60]

Thank you. I am still unclear of where to put my start up expenses that were acquired in 2023. I am using the desk top version and do not see anything that says 'start-up' expenses. Would it be on the page of 'nondeductible expenses from prior years?' The choices are operating expense, depreciation expense, amt. operation expense and amt depreciation expense. The expenses I am talking about would be supplies, furniture , etc all under $2500. The expenses that I had that were major improvements I added to the cost basis.

[RobertB4444]

ALL of your expenses from the prior year would be added to the cost basis.  Even the little ones under 2500.  So go back to the cost basis and add in these start up expenses as well.

If you do not add them to the cost basis they are lost forever.

@LDS60