Rental Property in another state

[jlaveck]

I've seen a few posts where some touch on this topic.  I purchased a home out of state in which my parents will be moving into with the expectation they will eventually start paying rent and sell their old house.  I've put quite a bit of money into cleaning, painting, refurbishing the place so they could move in, so I'm assuming a significant net rental loss when I tally up the receipts.  If I'm understanding correctly, I (1) don't necessarily need to file in the non-resident state, but it's recommended for the potential carryover into the new year and (2) need to include in my resident and federal return.  And if my parents aren't able to pay rent for the next several months, I just continue to operate at a loss?

[AnnetteB6 · Accepted solution]

The situation you described is a 'not for profit' rental.  This means that you are receiving less than the fair rental value for the property as income.  As such, you cannot claim any rental expenses for the property.  

When/if your parents start paying you a fair rental value for the property, then you can claim the rental expenses.  At that time, the money that you have spent making improvements to the property can be added to the basis for depreciation.  

If they do not pay you a fair rental value for the property, but you do receive rent, then you would report your income on your return.  Your expenses would be limited to your income though.  

In general, you would not file a non-resident return for the state where the property is located unless you have a profit from renting the property.  

[jlaveck]

Thank you! I closed on the property in October, and they still haven't moved in yet.  Would the timing alter anything you mention? 

[AnnetteB6]

Yes, the timing would allow you to claim some deductions for the property as second home.

Some things you could deduct on your 2019 return would be the property taxes that you paid, and the mortgage interest (if any) as long as you are not already deducting interest for more than one home.  Since it is not yet being rented (fair rental or not), it can be considered your second home for 2019.