Reporting of expenses on newly purchased short term rental property

[ToddS1]

We purchased a home in 2020 to use primarily as short term rental (ie-VRBO, AirBnB).  We started to rent the home at the end January 2021, so we had no income for it in 2020.

We had a good deal of expenses (bringing some things up to code, furniture, linens, professional fees).   As I understand it, we can put this 'against' any income in following tax years.   Since this is the case, do I need to report of these on our 2020 tax returns?

Thanks

Todd

[npierson7]

Yes, you should report the expenses in the year they occurred. You'll need to use Schedule E, rental income and expenses. The generated loss you'll be able to use to offset you rental income in 2021 and possible in following years.   

[ToddS1]

Thanks so much for the quick and concise answer.

Follow-up:

There is a good chance we'll only rent the house out for one year before we move into it (change of plans).  Given that we may not have enough income to offset all the expenses from 2020 (and those from 2021):

Are there any expenses (or categories) that you wouldn't bother to claim because of them being more problematic when the house was sold?

Thank you again.

[npierson7]

What you can deduct:

• General maintenance and repair costs.
• Utilities
• Insurance 
• Cost of services
• Agency and property management fees.
• Mortgage interest
• Property tax
• Depreciation

It isn't necessary to deduct everything, unlike income, you don't have to report all expenses. Cost of services deduction usually causes some additional expenses for filing 1099(s) forms. Also keep in mind, for depreciation purposes you'll need to split cost of your property between the land and the building. You cannot depreciate land. 

[ToddS1]

I am in the business part of turbo tax, filling out the schedule e section.

Under the screen "Was this property rented at all in 2020?"

If I check this box:

"I did not rent, nor attempt to rent, at all in 2020"

It says that I should delete this rental property.  This leaves me no way to enter expenses.

We spent three weeks there getting the property ready to rent, but we did not attempt to rent it out.

If I say we rented it "0" days, and that we had "0" personal days in it,  (but do not check the "did not rent nor attempt to rent' box), it will let me proceed.

Would this be the way to go? We really do have a fair amount of expenses we had in preparing the property that we'd like to (and I believe fairly) 'capture' against income.

Thanks

Todd

[ColeenD3]

One of the IRS rules is that for it to be a rental property, it has to be placed in service and ready and available to rent. That means that a tenant could move in at a moment's notice. From that time on, you can deduct expenses. Prior to that, improvements must be added to the basis of the property.

From IRS Pub 527: Vacant rental property.   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you cannot deduct any loss of rental income for the period the property is vacant.

If you did not place you rental in service yet - (haven't started advertising, still working on remodeling) - please keep records of all your maintenance and repairs. When you do place property into service - add all of these expenses to the cost of your property. The amount will increase your depreciation deduction when the property is available for rent.

If you did place your rental property in service - (the date that your property is ready and available for rent) you can deduct the expenses as usual.  When going through the rental information, once general questions about your rental are answered, you will be able to enter rental expenses. For expenses not listed, enter your own description and amount

[ToddS1]

Coleen-

Thanks so much for the answer.

Sounds like for the 2020 taxes, I do not even claim it as a rental property (as it did not rent). I will hold onto all my expenses for the 2020 year. Those expenses will be factored into the depreciation.

Since the unit was ready to rent at the start of 2021, those expenses will be deducted as normal.

I just want to make sure that by not claiming anything in 2020 I have not lost the ability to claim in 2021.

Thanks

Todd

[DianeW777]

Any capital improvements, to the building itself, will be added to the cost basis (purchase price) of the property, as well as any expenses attributable to the purchase, as indicated by @ColeenD3. Improvements are expenses that add value to the property and are part of the structure such as new floors, a roof, a remodel, etc.

Furniture and fixtures, including linens (anything with a more than one year life expectancy) will be a separate asset, but will be placed in service at the same time the property is available for rent so there is no loss to your expense.

You will not lose anything by not claiming it until 2021 since it was not yet available for rent until 2021. The date placed in service is critical to the year you are allowed to take the expenses.