Rental home depreciation

[jawckey]

I bought a brand new construction home in Feb 2023 and looked for rental, and finally rented from July 2023 through the end of the year. I bought it in cash (no loan) for $600,000/- approx and land value was $100,000/- approx. And there were sundry expenses like appliances and landscaping etc., added. These appliances, rental management fees, land scaping and sundry expenses came to some $12,000. And rental income from July to Dec 2023 was about $15,000. Turbotax premium calculated the depreciation to be $25,000/- which is $10,000 more than the rent. And I have W2 income as well. Pl. clarify the following. Appreciate the help.

- After entering W2 data and the above, Turbotax shows some tax refund for me, because I might have paid via W2. However it is not clear if I ended up needing to pay any tax on my rental income. Am I to understand that since the depreciation is more than the rental income, Turbo tax wouldnt have put any rental income tax. Is that correct?

- Since depreciation is more than the rental income, do I lose the $10,000 credit I have from the depreciation for year 2023 is lost forever or does it get carried over?

- The Out of $12,000 that put towards improvements after purchase, some items like land scape etc., cost more than $2,500. I took all of $12,000 as one time instead of per annum thing. Is this good to do? OR do I do it per annum depreciation so that I don't lose at least part of excess depreciation of $10,000 I mentioned above?

- This property is in Maricopa County, Arizona. And since home is brand new, they have not given me the final supplemental assessment. Nor the county site gives land vaule. However county office does show 'cash value' for 2024 (this year)  as well as 2023, with latter shown as land only. So I took this as the land value and entered it into turbo tax along with the purchase price for it to compute home depreciation for 2023. Is this correct way to do? I probably will not get new assessment for quite sometime

Pl. see if you could help.

regards

regards

[AmyC · Accepted solution]

1.The loss was greater than the income so you do not pay tax on the income.

2. Since depreciation is more than income, you will not lose it, you will either claim a loss in full, up to $25,000 or have it all carried over depending on your profession and income.

3. The $12,000 sounds like items that should have been added to the basis of your house for depreciating. I would suggest you change that part of your return.

4. You purchased property property and say the land value was about $100,000 with the house being $500,000. Therefore, the house value plus those $12,000 in expenses above are the basis for the house value. The land value is not depreciated and you will not use that again in future returns.

Be sure to keep all of your tax returns from the time of purchase until 3 years after you sell to track the depreciation taken, the unallowed passive losses and track other assets you purchase for the home. For more on purchase and renting, see Pub 527

[jawckey]

Thank you very much, very kind of you for clear response. But I might need to add a bit of detail.

For your point '3', the $12,000 has a few items. I followed TTax menus and I entered under these heads

A) Expenses:

     a) Utilities, HOAfee, Maitenance, Rent mgmt fees, insurance, property tax etc.                            -  6,000/- 

B) Assets/Depreciation:

     a) Residencail = Purchase price 500,000 -  land value 100,000) TTax calculated depreciation - 15,000/-     

     b) Landscaping =                                                                                                                                            3,000/-

     c) Appliances    =                                                                                                                                             3,000/-

In this, 12,000 comes from Aa, Bb, Bc.  WithTTax menus, I entered these amounts under

    "Assets/Depreciation - Property, Improvements, Appliances, Points' 

And thus assumed this 12K will become part of the basis just like Ba would have.

Am I correct till now? Pl. see if you can help verify the above for correctness.

Now since rental income was also just $15,000 only, it seems to have gotten netted off against Ba (15K). And thus the 12K (which in my earlier note I rounded to 10K for ease of communication) is left out as unclaimed loss. But I took one time 179 thing on this 12K, and thus got left out? I am vaguely understanding that you are suggesting to not to take 179 on this 12K OR add it to purchase price basis in Ba to spread it 27 year like house basis?

And if in 179 one time way or 27yr way, if the net is still loss, it will be still less than 25K you mentioned in your  '2'. Then does TTax will keep the loss with it and apply it somewhere in the final processing of this return? If, yes, where do I look in the TTax?

Pl. clarify.

regards

- 

[jawckey]

Pl. see if any tax expert can help with my question. Appreciate it.

regards

[DianeW777]

Yes, we can help.  Your questions are answered below.

The expenses of $6,000 are ordinary and necessary expenses for your rental so they would be currently deductible as an expense and not an asset.

Initial cost of building less land value is depreciated as Residential Property with a 27.5 year cost recovery period so the depreciation is also carried to the Schedule E as an expense ($15,000 in your example).

Landscaping and appliances are separate assets.

1. Landscaping is a 15 year recovery period.
2. Appliances are a 5 year recovery and although Section 179 can be used, if you aren't receiving a benefit in 2023, you should depreciate them so that you get a larger amount next year when it could make a difference.

Passive Activity Special Rules for Residential Real Estate:

Active participation is a requirement to be allowed to reduce other income by the loss on your rental property.  There is also an income limit that begins to reduce that amount.

Phaseout Rule: The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that’s more than $100,000 ($50,000 if you’re married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you’re married filing separately), you generally can’t use the special allowance. This is because the special allowance is reduced to $0 since the modified adjusted gross income is over the $100,000 amount.

• Rental Real Estate and Taxes

If you have any loss that is not allowed based on these rules, it will be carried forward on Form 8582, which is what you will look for in your return.

@jawckey