Should I report expense on 2019 or 2020

[mango954305]

Hi,

I purchased  an investement prperty on 1/10/2020 (closing date) by cash, however I have several expense occured on 2019 for this investement property which includes fee and interest paid to open and use fund from HELOC of my primary home, labor cost paid to stop violation from code enforecment, inspection fee.

In this case, should I report these expense on 2019 tax return or 2020 tax return (The concern is that I don't own this property until 1/10/2020, can I claim it on my tax return of 2019)? 

I prefer not to report this invesetment property on tax return of 2019 but report all expense of 2019 on tax return of 2020, is this allowed?

Thank you in advance

[CatinaT1]

You would report these expenses on your 2020 return.  Since you did not own the property until 2020 you can not deduct those expenses until after you owned the property.  If you would not have actually closed on the property and the deal fell through, you wouldn't be able to deduct the expenses at all.  That is why you have to wait to deduct anything until you actually own the property.

[mango954305]

Thank you CatinaT1

Does that mean if I own an investement property since 2019, it is up to me if I want to report 2019 expense on tax year 2019 or 2020? 

And is it still the case today that any expense (except interest, mortgage points and real estate taxes)  prior to the property placed in service can only be depreciated but not deducted? Does "Safe Harbor Election for Small Taxpayers" apply for the period prior to placed in service?

[CatinaT1]

No.  You do not get to choose, you deduct the expenses in the year they are paid.  

However, in the situation you described above, you did not own the investment property until 2020.  The expenses you incurred in 2019 related to that purchase are not deductible in 2019 because they are personal expenses.  You didn't own the investment property yet.  Since you did take ownership in 2020, now you can deduct the related expenses incurred during the purchase process.

Your start-up expenses are any expenses you incurred prior to placing the property into service.  These expenses are not deductible, but must be amortized.  There is a special tax rule that allows you to deduct up to $5,000 in start-up expenses the first year you are in business, and then deduct the remainder, if any, in equal amounts over the next 15 years.

[mango954305]

Hi @CatinaT1, thank you for your reponse again. However I am not qualifed for the startup expense (not first year in service, and real estate is not my primary income). I was referring to "de minimis safe harbor election". Here it says expense to acquire or produce tangible property needs to be capitalized except item under de minimis safe harbor election, if I understand it correctly:

https://www.law.cornell.edu/cfr/text/26/1.263(a)-2

(d) Acquired or produced tangible property -

(1) Requirement to capitalize. Except as provided in § 1.162-3 (relating to materials and supplies) and in § 1.263(a)-1(f) (providing a de minimis safe harbor election), ataxpayer must capitalize amounts paid to acquire or produce a unit of real or personalproperty

https://www.law.cornell.edu/cfr/text/26/1.263(a)-1

(f) De minimis safe harbor election -

(D) The amount paid for the property does not exceed $5,000 per invoice (or per item as substantiated by the invoice)

Also see this FAQ:

https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/rental-expenses/rental-expen...

Generally, deductible closing costs are those for interest, certain mortgage points and deductible real estate taxes.

Many other settlement fees and closing costs for buying the property become additions to your basis

If the statement of all expenses prior to property placed in service can only be capalized is true, then it seems to be conflict with the answer to this FAQ