Rental property renovations between tenants

[21mat5]

Hello,

I had a tenant move out of my rental property at the end of January 2021. The apartment was ready to rent but I decided to make some renovations (replaced windows, the entrance door, paint) in order to get more rental income. This, of course, means that during renovations, the apartment was not "available" to rent. The entire renovation was less than $2500. The next tenant moved in July 1st, 2021. 

Am I allowed to deduct those expenses? If so, can I deduct those expenses as part of the Safe Harbor? Do they go as improvement?

Thank you,

Mat

[Carl]

Am I allowed to deduct those expenses?

No, not as a deductible rental expense.

If so, can I deduct those expenses as part of the Safe Harbor?

No, because there's no doubt those improvements are "a permanent and physical part of" the structure. So cost doesn't matter.

Do they go as improvement?

They must be entered as a property improvement in the Assets/Depreciation section. They get classified as Residential Rental Real Estate and depreciated over the next 27.5 years. Depreciation starts on the date the work was completed, as that will be the "in service" date.

[RobertB4444]

If what renovations you did count as repairs and maintenance on the house (just getting it all back in shape) then it is 100% deductible this year.

If what you did qualifies as improvements - changing things to make them better - then it needs to be deducted or depreciated over time.

Here is a link to the IRS guidance about rental real estate.

[Carl]

(replaced windows, the entrance door)

Hand's down a property improvement that gets depreciated

paint

Painting is a maintenance expense and can be claimed as such. However, if the only thing painted was the new windows and door, then that cost is actually "a part of" the property improvements.  I doubt you only painted the new windows and doors though. Therefore the painting can be expensed.... and should be.

[21mat5]

Those renovations area considered as improvements. I know that.

Using your link you provided, I was able to find this:

https://www.irs.gov/businesses/small-businesses-self-employed/tangible-prop[product key removed]atio...

It states that I am allowed to elect the de minimis safe harbor and thus deduct the expenses rather than capitalize them: "The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable. If you elect to use the de minimis safe harbor, you don't have to capitalize the cost of qualifying de minimis acquisitions or improvements."

Now, since the amount was less than $2500 and I can deduct it, my question is:

Since those improvements were restorations to bring back the apartment to its former usable condition but I had not tenant for those 3 months of renovations, can I use the amount to offset the rental income I received in 2021?

[Carl]

Capital improvements are claimed in the tax year they are placed in service. It does not matter in what tax year the capital improvement is completed, or paid for.

Rental income is claimed in the tax year it is received. It does not matter what tax year the rental income is for.

can I use the amount to offset the rental income I received in 2021?

I suspect the above year should be 2022, not 2021. If so, then no, not if the improvements were placed in service in 2021.

Understand that it is not common for residential rental real estate to show a taxable profit each year. In fact, it's more common for residential rental real estate to show a loss each and every year it's in service. Once your passive losses gets your taxable passive rental income to zero, that's it. Any excess losses are just carried over to the next year. Therefore, with each passing year the amount of your carry over losses will continue to increase. You can't realize those losses until the tax year you sell the property. But of course, there's a catch. The IRS "never" makes it simple.

If you qualify (and you most likely do) a maximum of $25K of your excess passive losses are claimed against/deducted from your other ordinary income (such as W-2 income) each year.

To further clarify, when you add up the deductible rental expenses of mortgage interest, property taxes, property insurance, and the depreciation you're required to take by law, those for items alone will usually be more than the total rent received for the entire tax year. Add to that other allowed rental expenses such as repairs, maintenance and the such, and you're practically guaranteed to show a loss on line 26 of the SCH E. As explained above, a maximum of $25K is claimed against "other" income if you qualify, and any additional losses are just carried over to the next year.

[21mat5]

I believe we are discussing different things.

My apartment was rented up until January 30, 2021. Tenant moved out. Replaced windows and door, total cost of 2000 dollars. That took about 4 months. July 1st, 2021, a new tenant moved in. 

All I am trying to ask:

1. Despite making improvements to the apartment (new windows/door), I can still claim it as an expense (not depreciate it) in the year 2021 if I use the De Minimis Safe Harbor.

2. Even though the apartment was "not for rent" during renovations, those are still considered expenses if I did NOT intend to change the purpose of the rental property. 

[Carl]

can still claim it as an expense (not depreciate it) in the year 2021 if I use the De Minimis Safe Harbor.

Yes, provided you actually paid for it in 2021, and can prove it if audited. (slim chance of an audit, but not zero)

Even though the apartment was "not for rent" during renovations, those are still considered expenses if I did NOT intend to change the purpose of the rental property.

Yes, they are still valid rental expenses. Just because the property was vacant, and since you did not have any personal use of the property during the vacancy period, the classification of the property does not change, and remains as "residential rental real estate".  So even utility bills you paid during the period of vacancy are deductible rental expenses.

Please allow me to clarify a few things, mostly for others reading this thread, with some hypothetical concerns, which you did not post.

But I was basically living in the property for a few weeks, doing the labor myself. Is that personal use days?

No. You were not staying at the house as your primary residence, 2nd home, vacation home, or any other personal pleasure type of use. You were there for the primary purpose of "doing the work". So those days/night you stayed/lived there are not personal use days.

But while I was there doing the work, my spouse and kids stayed also for a bit of vacation time while I did the work.

Now you have personal use days since the property was used by the family as a vacation home during their stay. When you enter the personal use days in the program, all of your expenses for the entire tax year will be prorated and adjusted accordingly, including depreciation.