How to enter renovation expenses

[5palms]

I renovated part of my home/house in 2023 at a cost of prox $40,000. The improvements include demolition, wall changes,  flooring, kitchen cabinets and countertop. electrical upgrades and painting.  Where do I enter these on my tax return?

[JotikaT2]

You don't enter these expenses on your tax return.  They are not tax deductible expenses.   The only possible exception would be cost for energy saving improvements which could provide tax credits.

However, you should keep track of these renovation costs.  Whenever you decide to sell your home, you will be able to include these costs in the basis of your home.

Please see the attached link for more details.

Home improvements

[5palms]

Thank you, yes I understand that improvements to home are not deductible, however, I failed to mentioned that the renovation was for a newly created separate rental space in my home.  I believe that those expenses can be depreciated, but my question is where to enter them in TurboTax.

[DawnC]

Capital improvements that add to the value of your rental property, prolong its life, or adapt it to new uses must be depreciated over a period of time rather than deducted as a current-year expense.  You will enter any depreciable assets when you set up the rental property in TurboTax.   

To enter your rental improvements, simply follow the directions to enter your rental income and expenses.  At some point, you'll come across the Rental Summary screen.  Select Start next to Asset/Depreciation and follow the onscreen instructions.   We'll figure out which depreciation method works best in your favor.   

For the property asset, you will select residential rental and use the full cost of the property, including capital improvements such as a complete remodel of a room or rooms, or the fair market value (FMV) on the date of conversion, whichever is less. You can use the city or county tax assessment to determine the portion that should be land.

You can only depreciate the rental percentage of any asset.  The personal portion is never deductible.  In addition, common areas count as your personal portion of the property.   

[5palms]

Apologies, I neglected to mention that the reno cost was to convert space previously for personal use to new rental space.

[DianeW777]

If  you are saying that your renovations created a space that will be used full time as a rental for residential purposes then you can follow the instructions below.

• Per @DawnC: You can only depreciate the rental percentage of any asset.  The personal portion is never deductible. 

For the property asset you will select residential rental and use the full cost of the property being used for residential rental purposes, including capital improvements such as a complete remodel of a room or rooms as example, or the fair market value (FMV) on the date of conversion, whichever is less (usually cost when it comes to real estate). You can use the city or county tax assessment to determine the portion that should be land.  Remember that if this was not a complete addition to your home, then there is a portion of the original cost of the home that will also be included.  

• Total rental square feet divided by total square feet of the residence = the business use percentage for the asset and all expenses.
• Land is never depreciable and must maintain a separate cost basis.  Tax assessment for land divided by the total assessment for the house and land = the land cost basis.
• Suggestion is to use only the rental percentage of the building as an asset (not the cost of the personal portion if applicable)
• Enter only the rental percentage of other expenses for the year, real estate taxes, home owners insurance, mortgage interest and any other shared cost.
  • Where do I enter rental property income and expenses?

You can enter your rental assets, including your improvements by using the steps below.

1. In TurboTax, search (upper right) for rentals and select the Jump to link at the top of the search results.
2. Answer Yes to the question Did you have any rental or royalty income and expenses in 2020 for property you own?
3. Or select Edit beside your rental activity
4. Follow the on-screen instructions as you proceed through the rental and royalties section.
   • We'll ask you to enter general information about your rental (like description, address, and ownership percentage).
   • Eventually, you'll come to the Rental Summary screen, which is where you enter your rental income and expenses, assets and depreciation, and vehicle expenses. (You may have to select Add more expenses)
5. When you enter your rental house as an asset be sure to select Residential Rental Property (see below), the follow the screen prompts to enter all the details. TurboTax knows this is 27.5 year property.

TurboTax knows based on the date of conversion how to depreciate the property.  If you have used that section 100% of the time for rental after the date of conversion from personal use you must say it was used 100% for rental and that it was rented at fair rental value for your area (assuming that is true).

@5palms