Short term rental-furniture

[jimmy72]

Does the cost of furniture and furnishings for a short term rental incurred before the property is available to rent get added to the cost basis of  the property?  I understand that once the property is listed for rent, these costs can by depreciated.

[AmeliesUncle]

No, you depreciate them as separate assets apart from the building.

[jimmy72]

So then I also have the option of expensing the costs in the first year using de minimis safe harbor or safe harbor for small taxpayers?

[tbrown21]

not in first year. 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. That means you can use de minimis safe harbor or safe harbor for small taxpayers on the date you put the property available for rent. Suggest you check out pub 527. Link: 

https://www.irs.gov/publications/p527#en_US_2020_publink[phone number removed]

[jimmy72]

Thanks for the great reply's.  By first year I meant the year that I make the property available to rent.  If this happens to be toward mid or end of year do I then prorate the expenses that I am looking to deduct like the furniture.  Thank you

[Carl]

Furniture is a type of "equipment" that is used to generate income. It gets depreciated over 5 years.

If your cost is less than $2,500 per invoice, then you have the option of expensing it in that first year it's placed in service.  In my opinion, expensing it may be the better option. It just depends.

For example, in my county equipment used on a recurring basis to generate income is subject to a county imposed tax every year it's in service. If it's depreciated, then it's listed as an asset which proves it's use. Any money saved by depreciating it, is lost when you pay the county "use tax" on it.

For those that have short term rentals, you are required to register them with the county where I live. So the county "knows" it's furnished. They're going to tax every single piece of furniture in the house every year, regardless of how it's reported on your tax return.

[tagteam]

Whether or not the state in which the furniture (used in a rental property) imposes a tangible personal property tax is irrelevant for the purposes of deciding whether to expense the furniture (if allowed) or depreciate the furniture over its useful life. 

The local (or state) taxing authority will impose the tangible personal property tax on the furniture regardless of which method is used for federal income tax purposes.

[jimmy72]

But how can you expense furniture that was bought before the property was made available to rent?  It seems to me that would have to be added to cost basis of the property.

[Carl]

You can not and do not add the cost of furniture to the cost basis of the property. The property itself is classified as Residential Rental Real Estate. Furniture is not "real estate" any way you look at it. If you elect to depreciate the furniture, then it gets classified as such and is depreciated over 5 years.

This is specified in IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf page 29 second column under the "5-year property" heading.

[jimmy72]

great, thank you.

do i need to prorate the depreciation the first year dependent on which month the property is available like you do with the 27.5yr building depreciation?

[Carl]

The program takes care of the pro-ration for you, based on the in service date of the asset.

[tagteam]

@jimmy72 

Are you actually using TurboTax?

The calculations are handled by the program; you simply need to enter dates and figures.

[wleuter]

@tagteam 

I saw you post this as below. I just want to know if a state has some exemption about it if its cost is below some numbers. Also if I don't add them to my rental deduction, will state still tax them? Thank you!

Whether or not the state in which the furniture (used in a rental property) imposes a tangible personal property tax is irrelevant for the purposes of deciding whether to expense the furniture (if allowed) or depreciate the furniture over its useful life. 

The local (or state) taxing authority will impose the tangible personal property tax on the furniture regardless of which method is used for federal income tax purposes.

[tagteam]

@wleuter 

States that impose a tangible personal property tax typically have some sort of exemption.

For example, Florida exempts the first $25,000 in value from taxation.