Short term rental - deductions amortization - bought home in November 2020 - available for use January 2021

[taxesaretaxing123]

Hi!  I have a simple question (I think!).  I bought my short term rental home in November 2020 and it was available for use in January 2021.  When do I start depreciation of the rental home?  Can I take the start-up costs in 2020 or 2021?  If you could also point me to the publication - that would be amazing!  Thank you so much!

[Cynthiad66]

Here is the link to Publication 527 - 

About Publication 527, Residential Rental Property (Including Rental of Vacation Homes)

Publication 527 - Rental Properties

Actual Pub 527:

Pub 527

[Cynthiad66]

Here is the link to Publication 527 - 

About Publication 527, Residential Rental Property (Including Rental of Vacation Homes)

Publication 527 - Rental Properties

Actual Pub 527:

Pub 527

You begin to depreciate your rental property when you place it in service for the production of income. You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first.

You place property in service in a rental activity when it is ready and available for a specific use in that activity. Even if you aren’t using the property, it is in service when it is ready and available for its specific use. Example 1. On November 22 of last year, you purchased a dishwasher for your rental property. The appliance was delivered on December 7, but wasn’t installed and ready for use until January 3 of this year. Because the dishwasher wasn’t ready for use last year, it isn’t considered placed in service until this year. If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it wasn’t actually used until this year

[taxesaretaxing123]

Thank you so much!

Another question:  Prior to having the house available for its intended use (i.e. list on airbnb), we paid to:

- fix a cracked window (December 2020)

- paint the house (December 2020)

- bought various furniture and supplies for the house (December 2020)

How do I treat those expenses? 

[Cynthiad66]

Landlords often need to spend money to get their rental business started. Costs you incur before you are actually in business are called start-up expenses. Special tax rules govern the deduction of these costs. 

Start-up expenses are the costs you incur to get your rental business up and running. Any expense that would be deductible as an operating expense by an ongoing business is a start-up expense when it’s incurred before a business begins. Common start-up expenses for landlords include:

• minor or incidental repairs to get a rental property ready to rent
• outside office expenses paid for before a rental business begins, such as office rent, telephone service, utilities, office supplies, and office equipment rental
• home office expenses
• the cost of investigating what it will take to create a successful residential rental business, including research on potential real estate markets
• attending real estate seminars or conferences or other educational programs or classes
• insurance premiums (but not title insurance)
• maintenance costs for a rental property paid for before the property is offered for rent—for example, landscaping and utilities (but not the cost of connecting utilities)
• costs for recruiting and training employees before the business opens—for example, hiring and training an apartment manager
• fees paid to a market research firm to analyze the demographics, traffic patterns, and general economic conditions of a neighborhood
• business licenses, permits, and other fees, and
• fees paid to lawyers, accountants, consultants, and others for professional services; however, legal and other fees paid to purchase a rental property are not start-up expenses.

Unlike operating expenses, start-up expenses cannot automatically be deducted in a single year. This is because the money you spend to start a rental (or any other) business is a capital expense—a cost that will benefit you for more than one year. Normally, you can’t deduct these types of capital expenses until you sell or otherwise dispose of the business. However, a special tax rule allows you to deduct up to $5,000 in start-up expenses the first year you are in business, and then deduct the remainder, if any, in equal amounts over the next 15 years.

There is a limit on the amount of start-up expenses you are allowed to deduct the first year you are in business. For the past several years, the limit has been $5,000. You’ll have to deduct any expenses in excess of the first-year limit in equal amounts over the first 180 months (15 years) you’re in business. This process is called amortization. The 180 months is the minimum amortization period; you can choose a longer period if you wish (almost no one does).

[taxesaretaxing123]

Thank you again!  How do I specifically treat the furniture?  The furniture was bought in December 2020.  I want to use the deminimis safe harbor rule and just expense it.  But, what year do I expense the furniture in?

[DianeW777]

You expense the furniture in the year they are placed in service, based on your comments that will be 2021.  The rental unit is rented or available for rent and advertised as such.

If the amount is $2,500 or less then you may be able to directly expense this under miscellaneous deductions on the rental using the DeMinimis Safe Harbor rules.

De Minimis Safe Harbor Election

This election for items $2,500 or less is called the De Minimis Safe Harbor Election. This election is an option you can take each year that lets you write off/deduct items $2,500 or less as expenses instead of assets. Expenses typically reduce your income by a larger amount than depreciating an asset over multiple years does. This means you could get a bigger refund.

If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

Here are the rules you need to meet to take this election:

• You don't have an applicable financial statement (most people don't).
• You have a consistent process for how you record expenses and assets.
• You record these items as expenses on your books/records.
• The cost of each item as shown on your receipt is $2,500 or less.
• Rental Property select Edit > Other expenses > Other Miscellaneous Expenses
• Enter Description (Safe Harbor ...) and amount (not entered as assets under this election)

Note:  Because you are under the $2,500 threshold, you are not required to used section 179.  You can list these expenses under Miscellaneous.  If the amount was over 2,500, then you would enter these as assets and then would be able to choose the 179 option.

• Maintain a complete record with your tax return should you need to verify these items at a later time.

[taxesaretaxing123]

Thank you so much!  I appreciate all this help!  🙂

One last question.  What about the escrow fees, title fees, interest fees, property taxes etc?  Would those all be expensed in 2021 as the business was not available for use until then?

[JoannaB2]

It depends. Some closing costs are deductible and some aren't.  The loan origination fees or discounts, prepaid interests, and property taxes are the only amounts, paid to the escrow company, deductible on your Schedule A (Itemized Deduction).  Those fees are reported on 1098 Mortgage interests Statement.