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pixelrogue1
Level 3

Where does one go in TT to 'capitalize' expenses for a new investment property ~ to include as part of the basis?

I have a number of expenses on a newly acquired investment property in 2019, however the property was not formally rented until 2020. These expenses are mortgage interest, taxes, condo fees, improvements. I see the spot where the mortgage interest and taxes go, and these other expenses need to be capitalized/added to the basis? How is the accomplished?

5 Replies
ColeenD3
Employee Tax Expert

Where does one go in TT to 'capitalize' expenses for a new investment property ~ to include as part of the basis?

You can deduct these expenses once the property is placed in service and available to rent. Until that time they are your own personal expenses. They are neither capitalized nor added to basis. Mortgage interest and property taxes can be deducted on Schedule A.

 

Once the property is placed in service, you can deduct expenses such as condo fees as a miscellaneous expense. Improvements are always depreciated. If they were done before it was placed in service, add it to the basis and depreciated it as a whole.

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pixelrogue1
Level 3

Where does one go in TT to 'capitalize' expenses for a new investment property ~ to include as part of the basis?

Got it. How are those improvements done before placed in service added to the basis?

AnnetteB6
Employee Tax Expert

Where does one go in TT to 'capitalize' expenses for a new investment property ~ to include as part of the basis?

When you enter the details for depreciating the property itself, there is a series of questions and entries that you will make so that TurboTax can calculate the basis and the depreciation.  One of those questions will be the cost of improvements that were made to the property.  

 

@pixelrogue1

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Carl
Level 15

Where does one go in TT to 'capitalize' expenses for a new investment property ~ to include as part of the basis?

Below is information that will provide you the clarity that the program does not. Perfection in that first year as a rental is not an option - it's a must. Even the tiniest of mistakes will grow exponentially as the years pass. Then when you catch the error years down the road the cost of fixing it "will" be expensive.

FOr starters, if the property was not "available for rent" on or before Dec 31 of the tax year, then for that tax year it's not an investment of any type, in any way, shape form or fashion. You treat it as a 2nd home. The only things you can deduct as an itemized deduction on SCH A is mortgage interest and property taxes. That's it, with no exceptions. 

Other things such as your acquisition costs will be dealt with on the 2020 tax return next year. So you don't just "lose it".

By "available for rent" that means the property was physically "Move in ready" on or before Dec 31 of the tax year. If it was, then it doesn't matter if you actually had a renter in it or not. If it was not move in ready, then it's a 2nd home. You'll covert it from personal use to a rental on your 2020 taxes next year, and that is when you will deal with the property improvements.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence 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 Improvement.

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.

Repair

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.

 

pixelrogue1
Level 3

Where does one go in TT to 'capitalize' expenses for a new investment property ~ to include as part of the basis?

Very thorough....very appreciated. 

YES, important to get it right straight out of the gate. 

 

PROPERTY A
- closed in early November, 2019.

- improvements were made in December 2019 - Feb.20220
- costs were about $3k, w/about 1/3 of those receipts w/a 2019 date stamp. 

- closing included taxes, insurance, capital contributions + condo fees

- montage interstate's accruals during 2019.
- property was listed w/agent to rent in 2019 ~ it was 'ready & available' to rent in 2019. (yea!)

PROPERTY B
- 1031 Exchange purchase (different topic stemming from this)
- closed in late November, 2019.

- improvements were made in December 2019 - Feb.20220
- costs were about $3k, w/about 1/3 of those receipts w/a 2019 date stamp. 
- property was move-in condition when we closed. enhancements were not required. 
  that said, property b was not on officially on the market to rent until jan. 15th. property was in move0-in 
  condition from the very start. 

Yes, currently have one as second home (possibly another as a vacation rental) with the thought of converting them to rentals for 2020 return.

How would acquisition costs handled in 2020 return, when purchase was 2019? "

We never lived in either property. New construction, move-in ready when we closed. We added some enhancements that were not available from the builder was all. 


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