Just bought first rental property. Not a real estate professional. Closed January 16 2020. Does basis include all of the expenses spent acquiring property? i.e. Meals, mileage, appraisal, inspections. closing costs, memberships in professional organizations, books, TurboTax? And is depreciation based on Purchase price plus all of those expenses minus value of land?
Your basis does not include all of the expenses spent in acquiring the property. For example, expenses such as meals, books, memberships, software, et al, would not be included in your basis (although the expenses may be deductible under certain circumstances depending upon when they were incurred and paid).
A list of settlement costs that are added to your basis (and those that are not) can be found at the link below).
Further, note that you should allocate any costs that added to your basis between depreciable assets (such as a building/structure) and land.
As stated by user tagteam, many of the items you listed such as meals, mileage, etc. are not included as part of the basis of your rental property. However, those types of expenses will become rental expenses after your property is rented and you are visiting the property to maintain it.
When you are working on your 2020 tax return and start to enter your information into TurboTax, there will be guidance for you to follow in order to enter all the items that are included as part of the basis for your property. Keep in mind that if you make any improvements to the property before it is placed in service, then the cost of those improvements will be included as part of the basis. Otherwise, your general assessment that the basis is the purchase price, plus adjustments, minus land is correct.
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Expenses incurred in acquiring the loan are a flat out deduction from your income. Has nothing to do with what you paid for the rental. For example, loan acquisition fees you paid to the bank.
Expenses incurred in acquiring the property are added to the cost basis. For example, the title transfer fees paid to the courthouse to transfer title/ownership from the seller to you.
You are not a real estate professional. So things like transportation, lodging, means, etcs are just flat out not a deduction at all.
For the most part, the program will specifically ask you for those things you can claim and the program will take care of the math "for you" on what is deductible from where, and what adds to or subtracts from your cost basis.
Being this is your first rental, I can not stress enough how important *ABSOLUTE* *PERFECTION* is, reporting this on your taxes that first year. Even the tiniest of mistakes will grow exponentially as the years pass. Then when you catch your error (if the IRS doesn't catch it first) the cost of fixing it *WILL* be expensive. So understand that perfection is not an option - it's an absolute *MUST*. therefore I have provided the information below to help clarify things for you that (in my personal opinion) the program does not clarify enough for a first time rental property buyer/owner.
Rental Property Dates & Numbers That Matter.
Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.
RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property improvements are expenses you incur that 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 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.
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.
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 3rd 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.
You can deduct travel expenses for traveling away from home provided they are ordinary and necessary if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property.
Note that local travel between your home and a rental property generally constitutes nondeductible commuting costs unless you use your home as your principal place of business.
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