Summer rental home newly purchased, no income in 2020, only expense.

[Jerrylm]

Hi, we purchased a home in a popular summer vacation area with the intent to rent it out during the summer and use it ourselves during the off season.  We settled on it in October 2020, did some repairs and upgrades in November and December, and it will be rented through an agency this summer.

I am using TurboTax Home and Business, and have used Turbo Tax for many years, including when I operated a small consulting business.  My question is, how do I handle expenses in 2020 when TurboTax says I shouldn't list it as a rental since I didn't offer it for rental in 2020?  Do I just ignore this guidance and consider it rental property that just wasn't rented during that time?  It is in the section where TT asks how many days the property was used for rental and how many for personal.  I was going to put 0 for rental and 61 for personal.  

Even more basic question: I was planning for the rental property to simply show a loss for 2020 (no rental income, just expenses), and then forward that to the 2021 tax year when we will have (hopefully!) substantial rental income from the summer season.  Is this the correct way to handle this situation?

Thank You!  Jerry

[DJS]

Pre-rental expenses.  

You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent.

You cannot deduct rental expenses if the property has not been made available to rent. If it's vacant but available for rent then the below applies. 

If you did treat it as rental property then you'd have to say it was used for rental 61 days and 0 for personal use, even though rental income was 0. 

Also: 

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 can’t deduct any loss of rental income for the period the property is vacant.

[M-MTax]

I'd say that's a problem with turbotax because you should be able to deduct expenses as long as the property is available for rent......not necessarily rented and you didn't have any personal use. There's a $25k loss allowance but that gets phased out from $100-150k in MAGI but you can carry losses forward to next year anyway.

[Mike9241]

the property wasn't rental property in 2020 since you took no action to get tenants. you get no deductions on schedule E.  you can deduct taxes and mortgage interest on schedule E.

just a warning for 2021, based on the info you have provided. personal use days are greater than 14 days and days rented will be for more than 14 days. the unit is treated as a dwelling unit used as a home.  expenses must be prorated between rental and personal use (so for 2020 100% of expenses are personal - no rental datys). rental portion of interest, taxes and casualty and theft losses are not limited to rental income. other rental expenses (including depreciation) are limited to remaining income.  carryovers are allowed. 

[Jerrylm]

Hi, thanks for the reply.  So are we just out of luck on any improvements or repairs prior to rental availability?  That just sounds odd, I mean how many rental properties are ready for rent without having had work done prior to that time?  Or, is the tax year the main problem, since some of our expenses will be in a prior year?  Related to that, what about the new roof we had done in November 2020?  Will be handled through depreciation in Turbo Tax?  Or is that even considered an expense since it was prior to rental availability?  Do we really need to wait until the rental season to make any repairs or improvements?   We want the house to be ready for the rental season, not needing work. 

Thanks again,

Jerry

[M-MTax]

If the property is ready and available for rent you can deduct rental expenses.....period. Improvements need to be capitalized and their cost recovered through depreciation deductions. The number of personal days is ZERO UNLESS you used the home for personal purposes.....if you just worked on the home during those days those aren't personal use days. Turbotax has a problem because if you have a rental that's available and ready to rent all year but no income TT will delete the rental......not good.

[Jerrylm]

Hi, Mike9241, I would appreciate your take on the question in my previous reply, but I also have a question about your warning for 2021.  I realize that the expenses need to be prorated, but won't Turbo Tax do that automatically by asking for the number of days used for personal use vs rental?    Does this proration apply to all expenses?  

Thank you,

Jerry

[M-MTax]

If you use the home as a rental and a vacation home for yourself then you have to stay under14 days or more than 10% of the number of days rented whichever is greater for personal use......if you go over that you can only deduct expenses up to the level of income and can't deduct losses. Example is if you rent for 90 days during the year and use the home yourself for 30 days that personal use is more than 14 days AND more than 10% of the days you rented the place.....so no losses allowed.

[Critter-3]

Read the IRS pub 527 :  https://www.irs.gov/pub/irs-pdf/p527.pdf