We closed on our first rental property on 12/31/2020 (ie, only 1 day of rental income to report and claim deductions [mortgage interest, insurance, property taxes] or deduct expenses from).
Should we wait to report the property in our 2021 taxes and deduct expenses including closing costs?
Or do we file in 2020 and the closing-cost expenses will carry over?
Closing costs are added to the basis of the property; they are not deductible. You had rental income the same day you closed? If so, you need to report it. If not, you can't take any deductions until the property is placed in service and available to rent.
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Were you actually paid rental income on 12/31/2020? If so, then you report it on SCH E on the 2020 return.
I would venture to guess that either you purchased rental property that was already occupied, and the seller passed on one day of rent to you at the closing. If so, make sure you do "NOT" include that 1 day of rent in any of your closing costs. You will also find the below information helpful and informative.
Understand that when completing the SCH E for the very first time, absolute and total perfection in that first year is not an option. It's an absolute must. Even the tiniest of mistakes will grow exponentially over time. Then when you catch your error years down the road, the cost of correcting it will be high. So if you have questions, by all means ask. The only stupid question, will be the one you did not ask.
- Closing costs related to the acquisition of the property are added to the cost basis of the property. An example of this type of cost would be the title transfer fees paid at the courthouse to remove the seller's name from the property deed and replace it with the buyer's name.
- Closing costs related to the acquisition of the loan are amortized and deducted over the life of the loan. (Not depreciated, but deducted.) An example of this would be any points you paid at the closing, as well as any survey fees you paid for, provide that survey was required by the lender as a condition of you getting the loan.
Rental Property Dates & Numbers That Matter.
Date of Conversion - If this was your primary residence or 2nd home before, then this date is the day AFTER you moved out, or the date you decided to lease the property – whichever is later.
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 for any type of personal pleasure use 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, 2nd home, or any other personal use reasons 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.
Many thanks for the thorough answer and guidance! Yes, the unit was already occupied and the seller passed on 1 day of rent to us. So, we will report this on Sch E.
OK, so the closing costs related to acquisition of the property are to be added to the basis of the property (ie, purchase price + closing costs).
- This 'property' closing costs includes fees for title + transfer, recording, attorney , inspection, appraisal?
- Then where does the closing costs related to the acquisition of the loan get entered?
(Note: I haven't had a chance to walk through this section in TT yet; apologies in advance if the questions will be clear once I step through the Invstment/Sch E section.)