Rental property
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Rental property

I inherited my mother's home and am turning it in to a rental property.  It is not currently rented and there are many repairs required to make it 'rentable'.  I have read in many places I can't claim expenses without income, or until it's 'placed into service', which I want to confirm, and secondly, if true, does this include the property taxes and insurance I paid in 2019?  

2 Replies
Level 15

Rental property

Expenses incurred in the process of "preparing the property for rent" that very first time are flat out not deductible. Period. But do not confuse this with property improvements. There is a defined difference between property improvements, repairs, and maintenance expenses.

When you first place a property in service as a rental expenses for the rental portion are only deductible for the period of time the property was "in service". The property is considered to be in service the first day a renter "could" have moved in. IN other words, the day the property is move-in ready for a tenant. Generally, this is the day you put the FOR RENT sign in the front yard. If, on that day I walk up to you and pay you in cash the first month's rent and the deposit, if I can start moving it "that" "very" "minute" then that's the day the property is in service.

However, if on the day I pay you that rent and deposit and you tell me I can't move in yet because you still have work to do, then the property is not in service and available for rent on that day.

I can't claim expenses without income,

Flat out not true.

does this include the property taxes and insurance I paid in 2019?

Yes. But let me explain how that works.

Very few property taxing authorities assess yearly property taxes based on the calendar year. For example,my county assesses taxes based on a fiscal year that starts on Oct 1st of the calendar year, and ends on Sept 30th of the next calendar year. So for the period of Oct 1st 2019 to Sept 30, 2020 tax bills are sent out on Nov 1st fo 2019 and are due and payable in full with no penalties or interest by Nov 30th of 2019. After that date interest accrues until Jan 1st 2020. On/after Jan 1st 2020 your taxes are delinquent and that's when the tax roll auctions are announced. (You can lose your property to the highest bidder, but it's a 3 year process that I'm not getting into.)

 

So I paid my property taxes for the above mentioned fiscal year in Nov of 2019. When dealing with this on your taxes, property taxes paid in 2019 are considered by the IRS to be for the calendar year 1 Jan - 31 Dec 2019. If the property was "in service" on Nov 1 of 2019 then  1/6 of those property taxes paid are deductible as a rental expense on the SCH E. The remaining 5/6 of those taxes are a SCH A deduction for the period of time it was not classified as rental property in 2019.

The above works the same way for the mortgage interest paid on the mortgage in 2019.

For the property insurance, it's treated the same as is the property taxes. You will have to pro-rate the property insurance yourself though, as that's one of the few things the program flat out will not and can not pro rate for you.

Property insurance for the period of time the property was personal use is flat out not deductible anywhere on your tax return. Never has been. But the pro-rated amount is deductible as a rental expense for the period of time the property was classified as a rental. (in service).

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.
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 Improvement.

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.

Repair

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.

 

Before I get into the definitions below, here's some more information more specific to your situation.

I inherited my mother's home

I'm wondering if you have a mortgage on the property. Weather you do or not, understand that your cost basis is the Fair Market Value (FMV) of the property on the date of your mother's passing....*NOT* the date you inherited it, and *NOT* the date your name was put on the property deed.

and am turning it in to a rental property.

So on the date you got control of the property, it was basically a 2nd home and gets treated as such. It's conversion to rental property and in service date will basically be the same date.

Level 15

Rental property

"your cost basis is the Fair Market Value (FMV) of the property on the date of your mother's passing"

 

that's because the date of your mother's passing is the date you inherit it.

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