Rental Income / Expenses Proration and Residency

[ddubs82]

I own in a house in Florida that I lived in for 6 years before recently deciding to rent it out and move to Wisconsin.  I posted the house for rent beginning of September 2023 and stayed in the property to fix it while it was trying to rent it.  I rented my property in Florida starting on October 6th, 2024 and also claimed residency in Wisconsin on this date via change of address.   I received first / last months (2 months) rent on September 29th, 2023.  For 2023, a total of 4 months rent was paid. 

1.) Can I claim any expenses / deductions for September 2023 while I was fixing my property for rent? Updates that I did in 2023 and prior years?  E.g. - Impact Windows / Doors

2.)  Given that I began renting my property October 6th, 2023, do I prorate the rent received for October 2023?  Prorate Expenses?

3.)  Do I need to report the 2 months rent received on September 29th, 2023 as Wisconsin income given I was not a resident until October 6th, 2023?

4.)  Do I prorate 2023 expenses or use full amount on the date/year I paid?

• E.g. - Water Bill paid date - 01/17/2024, usage for 12/15/2023 - 01/17/2024. 
• E.g. - Internet paid date - 12/15/2024, usage for 12/16/2023 - 01/15/2023
• I am assuming these expenses are prorated per day?  Mortgage Interest, HOA, Property Insurance, Property Taxes

[AmyC]

1. All the expenses preparing it for rent are added to the basis to be depreciated. If you qualify for home energy efficiency credit, you can claim it since it was still your main residence. Energystar is a government agency with details for every year and credit.

2. Rental income is whatever you received during the year. It isn't prorated. Expenses for the rental began Oct 6 so you would prorate property tax, mortgage interest, etc.

3. No, it was not received while a WI resident You will prorate your rental income/loss for the time in WI

4. Deductions are made when paid for most taxpayers, cash basis.  See Tips on Rental Real Estate Income, Deductions and ... - IRS which states: 

As a cash basis taxpayer you generally deduct your rental expenses in the year you pay them.

4b. Prorating by the day is correct.

References:

Pub 527 residential property

About Publication 551, Basis of Assets

[ddubs82]

I need further explanation on the following points.

1.)   I am referring to things here such as repairs, cleaning, and painting.  Aren't these items expenses and not assets thus they would not be depreciable?  Can I write off repairs, cleaning, and painting performed before the in service date?  

4.)  You stated the following "As a cash basis taxpayer you generally deduct your rental expenses in the year you pay them". but then indicated  "Prorating by the day is correct" which seems contradicting.  

Do you deduct all expenses the same way?  Meaning some you pro-rate and others full in the year you pay them?  Water bill and Internet different than Mortgage Interest, HOA, Property Insurance, Property Taxes?

• E.g. - Water Bill paid date - 01/17/2024, usage for 12/15/2023 - 01/17/2024.
• In doing 2023 taxes, prorate for the 2023 days or deduct full amount in 2024 and not include any amount in 2023? 
• E.g. - Internet paid date - 12/15/2023, usage for 12/16/2023 - 01/15/2024
• In doing 2023 taxes, Prorate for the 2023 days or deduct full amount in 2023 and not include any amount in 2024?

Thank You

[DianeW777]

Here are the answers to your questions.

1. It depends.  If the property was available and listed or marketed as available when you were doing the repairs, painting, cleaning then you can deduct them.  If not they would be startup expenses if they were not capital improvements to the structure such as the windows and doors. 
   • Start-up Expenses: You can deduct up to $5,000 in these expenses the first year your rental is available for rent. This will be 'Other Expenses'. 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. 
2. (4)  Expenses are deducted in the year paid - period. They are prorated for you in regards to any payment made during the personal use period.  Any payment beginning in October is fully deductible.  Prorated expense examples would be insurance, property taxes, mortgage interest, which cannot be deducted for the full year expense.
3. Water bill paid in 2024, is a deduction next year. Internet paid in 2023 is deductible.
4. The rental property is 100% rental activity from October, which is the date placed in service.   When you enter the rental asset home you will enter the date acquired and the date placed in service which are different.  You will also enter the full cost (original purchase, purchase expenses, capital improvements) then you will enter an amount for land (if you own land with your home). The amount for land can be calculated by using the tax assessment for your property and dividing land value by the total value of the property. TurboTax will know how to calculate the depreciation by this date and will also reduce the total cost by the amount of land (if applicable).
5. If the house is rented at fair rental value for your area you can deduct any expense directly related to the rental activity.
   • Proration will be done by you manually for the expenses that encompass the whole year and were paid in 2023. 

• All information agrees with the information provided by our Tax Expert @AmyC.  Please enter any other questions here  if you need additional information.

@ddubs82 

[ddubs82]

For 1.) I am not seeing Other Expenses with regards to the Start-up expenses in Turbo Tax.  Can you please help me navigate to this?  

[DianeW777]

It is in your list of expenses for your rental property.

1. Search (upper right) > Type rentals > Click the Jump to... link > Edit next to your rental activity
2. Select 'Add an expense or asset' > Scroll to Miscellaneous Expenses and check the box > Continue
3. This brings you back to your Rental Property Info screen > Scroll to Expenses and select Start beside Miscellaneous Expenses
4. Enter your description startup expenses > and the amount

                                        

[ddubs82]

Hello,

I have the desktop version and your instructions don't work for me.  Clicking the search opens up help and typing in Rentals does not show a Jump to Link.  Please advise.  

Thank you

[VolvoGirl]

Type rentals and then hit the enter key right away.  

Or Go to Federal Taxes tab (Personal for Home & Business)

Wages and Income

Choose Explore on my own (if it comes up)

Scroll way down to Rentals and Royalties - click start or update

First it will ask you to enter information on the property. Then after a LOT of screens asking questions you will get to a screen saying

Let Us Enter Your Rental Info for You

Check the last circle to Enter my rental info myself

Then you will see a screen listing….

Rental Income - click Start or Update

Expenses - click Start or Update

Assets/Depreciation - click Start or Update

Vehicle Expenses - click Start or Update