I did not attempt to rent the property at all in 2023 due to the need for extensive repairs and updates.
Because no attempt was made to rent this property on or before Dec 31 of 2023, you have absolutely nothing what-so-ever to report on SCH E concerning this property. As far as the IRS is concerned, this was personal use property from the date you purchased it, through Dec 31 2023. Kinda like a 2nd home. Therefore, the only thing you can claim on your 2023 tax return is property taxes and mortgage interest as a SCH A itemized deduction. That's it. However, don't lose hope. Other things can be claimed in the tax year you place the property in service as a rental.
Publication 527 states that "If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses......
That would be true if the property was classified as a rental in 2023 *and* you were actively trying to rent it. However, it's not true based on your statement, " I started renting the property on January 2, 2024. At no point was there any personal usage of the property in 2022. It was vacant throughout 2023." Now if you were advertising on or before Dec 31 and can prove it (in case of audit), then no problem. Proof would be things like newspaper or online advertising where you can show the advertisement was available to the public in 2023, or a contract with a signing date of Dec 31 2023 or earlier. (Note the contract signing date can be on *or before* the contract start date.) That would give you the necessary proof of being "held out for renting" in 2023.
As it stands now, the only things you can claim on your 2023 tax return is property taxes and mortgage interest, and those are a SCH A itemized deduction.
For the 2024 taxes you will complete next year, you will be able to claim/deduct your closing costs with no problem. It doesn't matter if those costs were paid in a prior year either. They're still deductible on the SCH E. For other costs, there are limits. Please read the below to help you understand.
One thing I can't stress enough is the need for absolute perfection in the first year you do file SCH E. Perfection is not an option.... it's a must. Even the tiniest of mistakes can (and will) come back to bite you later, as they can tend to grow exponentially over time. Then when you catch the mistake... usually years down the road in the tax year you sell the property, the cost of fixing it "will" be expensive. So please, if you have questions, by all means asks. I'm sure you've heard the phrase, the only stupid question is the one you didn't ask. So don't let that hold you back. It's not like we learn this stuff through osmosis. I certainly didn't.
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, or the date you decided to lease the property – whichever is later.
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 was contracted to move in, and/or "could" have moved in. That would be your "in service" date or after if you were asked for that. Vacant periods between renters do not count for actual days rented. Please see IRS Publication927 page 17 at https://www.irs.gov/pub/irs-pdf/p527.pdf#en_US_2020_publink1000219175 Read the “Example” in the third column.
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, 2nd home, or any other personal use reasons 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 Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.
Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.
Expenses for these types of costs 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 need to 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 retain or 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.
There are rules that allow you to just flat-out expense and deduct some property improvements instead of capitalizing and depreciating them, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.
Cleaning & Maintenance
Those expenses incurred to maintain the rental property and its assets in the usable 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 for the very first time are not deductible.
Repair
Those expenses incurred to return the property or its assets to the same usable 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 for the very first time 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.
