Sign Up

Why sign in to the Community?

  • Submit a question
  • Check your notifications
or and start working on your taxes
cancel
Showing results for 
Search instead for 
Did you mean: 
jrad99
Returning Member

How do I handle prior-year rental property expenses in Turbo Tax since property had not yet been available for rent?

Hello everyone, I am brand new to Turbotax.  Here is my story and I have a few questions:

 

I recently retired from corporate life, and I am now concentrating on my “second” profession which has been fixing up old houses and renting them out.  I have been doing this side activity for many years. 

 

I have been using accountants to complete my taxes through the years, but now that I am entirely self employed,  I am shifting over to Turbotax, since I have more time to handle these details plus I specifically want to cut back on accounting and professional fees.

 

In addition to three ongoing rental properties, I recently acquired two inner city brick townhouses for cash that I have been gradually fixing up over the last couple of years.  My property taxes are low, and I have no mortgages on these two townhouses, so I have chosen to take my time in them preparing them for rental.  These two properties were not available for rent during the prior two tax years.

 

 For the prior two tax years (2017 & 2018), I noticed that the accountant did include my three original ongoing rentals on my schedule E  but did not include any real mention of the recent two townhouses other than including my townhouse property taxes (negligible) on Schedule A Line 6 –Real Estate Taxes for the second of the two prior tax years they completed.

 

So 2019 is the first tax year that I am trying to complete myself, and I am currently entering my data into Turbotax Home & Business.  Note that I began renting one of the two townhouses during the 2019 tax year, so its my understanding that I can now include the prior two years of expenses, meanwhile I continued to fix up townhouse #2 and so it was not yet available for rent in 2019.

 

A few questions:

>If I understand correctly, for the prior two tax years, I could not include the townhouses on my schedule E, because they were not yet available for rent, correct?

 

>But apparently it was okay for the townhouse property taxes to be included on my Schedule A Line 6 Real Estate Taxes? ( and I noticed that accountant included the property taxes in the second  tax year but not for first year).

 

>So since 2019 is the first year that I am handling in Turbotax and now that the first townhouse has been rented in 2019, how do I handle the not-yet-recognized townhouse #1 expenses for the two prior tax years?  Do I essentially roll up the two prior years of townhouse #1 expenses and then amortize over the next X years?  Am I correct that the amortization period should be 15 years?

 

>The two years of townhouse #1 expenses total $15.5K and include:

Auto & Transportation= $4.4K

Legal & Prof fees=$1.9K

Clean & Maintenance=$0.6K

Repairs=$2.0K

Supplies=$4.3K

Property Taxes=$0.5K (this excludes property taxes noted in paragraph 5 above)

Utilities=$0.6K

Depreciation=$1.2K

 

So I just sum up these expenses and amortize over 15 years?  Any thoughts and comments sincerely appreciated.  Thanks!

5 Replies
martinmarks1919
Level 9

How do I handle prior-year rental property expenses in Turbo Tax since property had not yet been available for rent?

Accountants and professionals are there for a reason and it's because the knowledge they have is their business and not yours which is fixing up old houses and renting them. One glaring lack of knowledge is the idea that the expenses are amortized over 15 years while amortization applies to intangibles and not real estate rental expenses or improvements. 

 

 

1. If the properties aren't ready for rent, you can't deduct expenses but you can add improvements to basis.

 

2. Property taxes paid in the tax year are deductible on SCH A but subject to tax reform limitations.

 

3. No rolling up of expenses from past years where the property was not ready for rent but improvements can be added to the basis for depreciation.

 

4. Residential rental real estate is depreciated over 27.5 years not amortized over 15 years and the improvements are amortized over 27.5 years.

Carl
Level 15

How do I handle prior-year rental property expenses in Turbo Tax since property had not yet been available for rent?

@jrad99 welcome to TurboTax. I've been using the program since 2003 and absolutely love it. However, it's not perfect and TurboTax doesn't claim it's perfect either. Every year they're constantly having to get updates and corrections out during tax filing season. Makes me glad I don't work for them and that I"m no longer a programmer. I can only imagine a programmer working for TurboTax probably gets grey hair before they're 40.

 

While for some as first time users of the program the learning curve can seem steep, it really doesn't take that long to get the hang of it. The main thing is patience. As a first time user of the program I do *NOT* recommend you use the online version of the TurboTax program. For a first time user, compared to the CD version of the program you may find the online version to be extremely frustrating and very user unfriendly. Whereas the Desktop version is much more user friendly, easier to navigate and easier to deal with user problems and issues. Much, *MUCH* easier. To this day I still use the CD version because I find the online version  lacking in features and capabilities that I use and prefer, not to mention the online version is *S*L*O*W*E*R* *T*H*A*N* *M*O*L*A*S*S*A*S rolling up hill. So that's another reason I recommend a first time user of the TurboTax program use the CD version that they can purchase and physically install on their Windows or MAC computer, for at least their first year using the program. You can switch to the online version in later years if you so desire.

Now I assume your 2019 taxes have already been filed and you are in possession of a paper copy of that return. If so, then I think it would be a good idea to purchase and Install TurboTax 2019 on your computer, and use that program to duplicate your already filed 2019 return. Not only will this make using TurboTax 2020 to file your taxes next year easier, it will also be faster for you. The program will "import" data from the previous year's tax file if that tax file is on your computer and availalbe to the program, thus saving your hours of time entering date a 2nd time, that you've already entered in a prior year.

With the CD version there are three flavors you can use and any one of them includes the SCH E needed to report rental income and expenses. The only basic difference between each flavor is the level of in-program help that is available to you. First, there's TurboTax Deluxe. That's followed by the Premier flavor which cost a little bit more. Finally, there's the TurboTax Home & Business flavor which cost the most. I would suggest you purhcase the CD version of TurboTax Premier and install it.

you can purchase the CD version of whatever flavor you deisre and install it "right now" if you desire, at https://turbotax.intuit.com/personal-taxes/cd-download/  During the order process I would suggest that you select to download the installation file so you can install the program without having to wait for the CD to arrive in the mail. I also suggest you go ahead and order the CD too, so you'll have it should you need to install it again in the future, or need to install it on a new computer when the time comes to replace the one you have right now.

You'll find you'll learn a lot about tax law too, particularly as it relates to rental property. But it doesn't happen over night. I've been a landlord with 3 rentals of my own for close to 30 years now, and it seems that every single year I learn something new. To get you started, the below information is provided as a rough start to the learning process. As always, if you have questions then by all means please ask. The only dumb question is the one you didn't ask.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2nd home before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that “better” the property. Basically, they retain or add value to the property. Expenses for this 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 must 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, he will appraise it at a higher value, than he would have without the improvements.

There are rules that allow you to just flat-out expense and deduct some property improvements, 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 useable 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 are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable 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 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.

Carl
Level 15

How do I handle prior-year rental property expenses in Turbo Tax since property had not yet been available for rent?

P.S.  I just looked at the prices to buy the TurboTax program directly from Intuit, and am shocked at how high they are. You will probably find better pricing at a local retailer, such as Wal-Mart, Office Depot or Target that will make it worth the drive.

 

jrad99
Returning Member

How do I handle prior-year rental property expenses in Turbo Tax since property had not yet been available for rent?

Carl, great summary, thanks!

jrad99
Returning Member

How do I handle prior-year rental property expenses in Turbo Tax since property had not yet been available for rent?

Martinmarks1919,

Thanks for explaining!

Dynamic AdsDynamic Ads
Privacy Settings
v