Your rental start-up costs would be amortized on your Schedule E, not a Schedule C. Your start-up costs are accumulated until you become operational. Expenses such as pre-operational acquisition costs, investigation costs, proof-of-concept costs are included in start-up costs. In the year you become operational you can deduct $5,000 of start-up costs with the balance spread over 180 months beginning with the first month you are operational. You would list this expense in your return as “Start-Up Expense Amortization.”
Improvements and betterments to your rental property, however, would be included in the depreciation base for this asset.
Except as otherwise provided in this section, no deduction shall be allowed for start-up expenditures.
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/195">https://www.law.cornell.edu/uscode/text/26/195</a>
Section 195 is inapplicable to rental property because renting is not considered an active trade or business, but rather a passive activity.
Code Sec. 263 requires the capitalization of amounts paid to acquire, produce, or improve tangible property.
Sec. 1.162-4, Income Tax Regs. Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, must generally be capitalized and depreciated in accordance with section 167.
Expenditures must be capitalized if they are for permanent improvements that increase the value of the property, substantially prolong its life, or adapt it to a new or different use.
Repair type expenditures made before the building or apartment is put in service (i.e. has a tenant) have to be capitalized.
Thus, the temporary regulations retain the bright-line rule that requires a taxpayer to capitalize costs that are incurred prior to the date a unit of property is placed in service.
Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property
Not sure if I agree. It is not crystal clear, however, but I would lean toward Sec 195 applying to rental properties. One, rental properties can rise to the level of a TorB for various purposes - RE professional status and Sec 199A for example. Even if it doesn't rise to that level or you disagree that it can for Sec 195 purposes, the capitalization and deduction rules for startup activities also apply to Sec. 212 activities. Sec. 212 activities are those conducted for the production of income as opposed to trade or business activities.
Long term residential rental real estate is reported on SCH E.
Start up expenses for long term residential rental real estate are *NOT* allowed; just like a home office for same is not allowed.
IRC Sec 195 refers to an "ACTIVE" trade or business. With rare exception, long term residential rental real estate produces "PASSIVE" income, and therefore is not an "ACTIVE" trade or business. There are conditions that must be met in order for long term residential rental property to be considered an active trade or business. If you only have one rental property, I seriously doubt it comes anywhere close to qualifying as an "active trade or business".
Since this appears to be your first time dealing with rental property, please read all of the below and make sure you understand it. Feel free to ask questions if you need further clarity. Absolute and total perfection in your first year filing SCH E is not an option; it's an absolute *MUST*. Even the tiniest of mistakes in that first year will grow exponentially over time. Then when you catch the error a few years down the road (if the IRS doesn't catch it first) the cost of fixing it will be $expensive$.
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 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.
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.
Disagree for the reasons and citations referenced above. To further clarify, the code states that with a "regular and continuous involvement" the rental activity qualifies as an active trade or business.
And it follows that the home office deduction is also available to the rental activity.
Yes, you need to have a type of ledger or book that has a listing of all the costs of the asset and improvements, including the purchase price, that will be added together to determine the adjusted basis going into the capitalization of the asset. Once you get a total, then you have an asset cost and are ready to set up depreciation
Please refer to the following link for Basis of Assets assistance from IRS Pub 551:
Please refer to the following link for information about Residential Rental Property: