In July 2019, I purchased a rental property out-of-state. I spent the rest of the year (July-Dec 2019) repairing and improving the house. It wasn't rented. It still hasn't been rented because it's still being repaired. I have put money into the repair and improvements.
Under Rental, (schedule e) you can only enter deduction and asset information if you actually "rented" the property and generated "rental income". This isn't my situation because the property still wasn't ready to be rented out (still isn't in even now Feb 2020).
Where do I deduct the cost of the improvements by depreciating it over a period of time?
Where do I enter all my expenses and repair cost, if this situation even applies to that?
Where "exactly" do I enter my depreciation deduction/ asset in TurboTax (Mac Download)?
**I need it clearly stated and pointed to the exact location in Turbo Tax (Mac Download)**
You begin depreciation once you place the property in service. This means it is ready to be rented. Until the property is ready and available to rent your cannot depreciate it.
You can deduct the property taxes and mortgage interest you paid for the rental property as an Itemized Deduction as a second home until the property is ready to rent.
But as far as the repairs I've made, can I expense those as Itemized Deductions ?
Some of the work are repairs, some are improvements.
What can I actually deduct for my taxes this year?
What you need to do is capitalize all the expenses incurred as improvements since the property is not available for rent at the moment. First, you have to get the HUD-1 document where you could find details of the purchase of the property. This will be the initial depreciation basis but make sure the land is not set up to be depreciated. Then you will also include the improvements you are making on a separate line and set the amount up to be depreciated over the same number of years, that is 27.5 the same as the building. You will start the depreciation when the property is ready and available for rent.
Here's how to enter the depreciation:
Enter your rental property information through the TurboTax guided questions (or choose edit rental property if property is already listed) until you come to a screen that is titled, Your "rental property name" rental summary. You will enter your rental property house here under "assets/depreciation".
The property won't be available to rent until March 2020. The property is still currently being worked on. It is not ready to be rented. Since 2019 has already passed and I paid money to have work done on the property, how do I deduct my expenses?
Some of the work done were repair some were improvements.
If I am not renting it, I can't enter it as a depreciation in 2019. Can I deduct my repair work as expenses? Does it make sense to do it that way?
As par IRS rule: "If you hold a property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you can't deduct any loss of rental income for the period the property is vacant."
I don't have any rental income to deduct so I know I won't be able to deduct it.
But your saying you can deduct ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant.
Where do I enter the depreciation aspect of it on in Turbo Tax, if my rental property hasn't generated in any income?
Enter your rental property information through the TurboTax guided questions (or choose edit rental property if property is already listed) until you come to a screen that is titled, Your "rental property name" rental summary. You will enter your rental property house here under "assets/depreciation".
You can only get to this screen IF your rental property is listed and generating income. This isn’t my situation.
Currently, my property ISN’T available to rent. It is STILL being repaired and still having improvements made to it.
I need to know where I can enter assets/depreciation amounts when my property hasn’t been listed or rented on Turbo Tax guided questions?
Where do I enter repair expenses for the property on Turbo Tax guided questions?
There is no place to enter these amounts.
Your property is not an active rental right now, nor is it available to rent. The amounts for any improvements are added to the basis. You can't deduct any expenses until the house placed in sevice, meaning it is ready and available to rent.
So I just read over the Placed in Service documentation on the IRS website.
It doesn't say anything about NOT being able deduct expenses. But what you're saying is, because the property is not ready actively renting or not available to rent, that I can't deduct any of the repair expenses until I actually have it available?
If this is the case, then all the repair work I did in 2019, I won't be able to deduct until 2020 tax year, because I plan to have the property in the rental market next month?
Please help me understand
“You begin to depreciate your rental property when you place it in service for the production of income.” See When does depreciation begin and end, IRS publication 527.
Your amounts paid for any improvements to the rental property in 2019, and
Your amounts paid for any improvement to the rental property so far in 2020,
are added to the cost basis of the rental property.
You will deduct expenses including the depreciation of your rental property after the rental property is placed in service for the production of income.
So, if I had repair expenses for the year of 2019. I can still deduction them in my 2019 taxes, even though its now 2020, as long as my rental property is place in service in year 2020?
No, you will not be able to deduct your expenses for repairs and improvements in 2019. This is because your property is not ready and available to rent. In other words, you have not made it available to be rented yet because you are still repairing and making improvements to the property. You stated that the property will not be available for rent until March 2020.
Per IRS Publication 527, "you place property in service in a rental activity when it is ready and available for a specific use in that activity."
You will need to keep a record of all of the expenses and repairs you have made to the property. All of those expenses will be added to the original cost of the rental property. In 2020, when it is available to rent, the cost of the property plus all of your expenses and improvements will be added together and that total will be your basis in the rental property. This basis will be used to calculate your annual depreciation deduction for the property. The first year you will be able to claim a depreciation deduction will be in 2020 when the property is ready and available to rent. Rental property is generally depreciated for 27.5 years.
When you say, The first year you will be able to claim a depreciation deduction will be in 2020 when the property is ready and available to rent.
Are you saying, once I put my property in service, I have to wait until I file taxes next year to claim the depreciation deduction and repair expense, OR, are you saying that once I put my property in service (March 2020), THEN I can start depreciation deduction and expenses, right now?
Once your property is placed in service, then this begins the depreciation of your property. So yes, it would begin in 03/2020 if that is when you plan on putting this into service.
Okay, so once I put in in service for March 2020, since I haven't filed my 2019 taxes yet, I can start to expense all of the repairs, or do I have to wait until 2020 to get the deduction?
I know I can begin the depreciation in March 2020, when I put my property in service, but when can I expense all of my repairs for 2019? Can I expense them when I file my taxes for this year (2019) after March 2020 or next calendar year (2020)?
This part still isn't clear to me.
Normally, repairs can be deducted immediately and only improvements must be depreciated. However, if your property is not in service, you cannot deduct the repairs immediately. If your property was not in service in 2019, you cannot deduct the repairs in 2019. However, they are not lost. In this case, you will have to capitalize them (add them to your basis), and recover them through depreciation when the property IS placed in service. The term of depreciation will depend on the property class.
Based on the information you've provided, there's nothing for you to enter into TurboTax this year regarding your rental property.
Unfortunately, I cannot give you advice on how to enter this information until the 2020 program is released (sometime in 2021).
Okay, this makes a lot more sense.
But my follow up question is, why do I have to capitialize them (add them my basis), and recover them through depreciation when the property is in service? Why can't I just deduct all of the repair expenses AND depreciate the improvements when I file taxes for 2020? Why do I have to only depreciate them over time?
@GiseleD , @DaveF1006 , @BarbaraW22
Okay, this makes a lot more sense.
But my follow up question is, why do I have to capitialize them (add them my basis), and recover them through depreciation when the property is in service? Why can't I just deduct all of the repair expenses AND depreciate the improvements when I file taxes for 2020? Why do I have to only depreciate them over time?
The property is not in service until is it available and ready for someone to rent.
When the repairs to the property need to be done before it can be rented and will add life to the property the amounts need to be capitalized and depreciated over time not all in one year.
where do I claim depreciation when I HAVE got a rental income from it?
If a rental property is not available to be rented yet because you are still fixing it up to be eventually rented, then you cannot take any deductions on it until it is actually able to be "placed in service" to be rented.
Once your property is available to be rented and is "placed in service" as a rental property, you would include the income and expenses on Sch E of the individual return if it is personally owned. The depreciation will be a deduction on the Sch E and will be calculated and reported on Form 4562 for the rental property
For additional information, please refer to the following link:
Here's the bottom line.
Nothing concerning the property is reported on SCH E until the tax year the property is placed in service and "available for rent".
- Until then, keep all receipts and paperwork.
- Until then, the only thing you can claim on the property is mortgage interest and property taxes as a SCH A itemized deduction. That's it.
- Repairs, maintenance expenses, utilities,etc incurred before the property is available for rent are just flat out not deductible. Not ever.
- Property Improvements (different from repairs) are those things that add value to the property. It does not matter in what tax year that property improvement was done either. Property improvements get added to the cost basis (what you originally paid) of the property in the tax year the property is placed in service, and depreciated over time. Depreciation does not start until the first year the property is placed in service.
Now in the case where it's taking over a year to get the property to a point where it's "available for rent",it's a fair bet that you'll be able to claim almost all costs associated with the structure (as well as bonafide land improvements) as property improvements in the year you place the property in service. But things like utilities and routine maintenance (such as yard maintenance) expenses incurred before the property is placed in service, are just flat out not deductible and never will be.
Below are a few definitions to help you understand the differences between the different types of expenses.
RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property Improvement.
Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.
Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.
Expenses for these types of costs 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 need to 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 retain or add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, (not the county tax appraiser) they will appraise it at a higher value, than they would have without the improvements.
There are rules that allow you to just flat-out expense and deduct some property improvements instead of capitalizing and depreciating them, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.
Cleaning & Maintenance
Those expenses incurred to maintain the rental property and it's assets in the usable 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 the very first time are not deductible.
Repair
Those expenses incurred to return the property or it's assets to the same usable 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 the very first time 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.