How to claim rental expenses from personal-to-converted rental property with no income?

[narayananvm]

Hello Fabulas TurboTax Fam!

I would like to seek how to claim rental expenses on my recently converted rental property that had no income in TY2022.

Context:

1. First time landlord. Closed on a new property (primary residence) on mid of September 2022.

2. Gradually moved to my new primary residence from my old property by around mid of October 2022.

3. Did some house fixes to prep my old property for taking rentals during the gradual move out.

4. Worked with my rental realtor to post MLS listing and "Ready for Rent" post on the yard, on 10/22/22 for immediate move-in.

5. After few potential tenant walkthroughs, none led to application stage so took the feedback of my realtor to repaint and did some more fixes on the property (fences, microwave, etc.) during November 2022.

6. Finally, got an application for a move in date of 16th December 2022. Property was occupied by tenants for 16 days in TY2022.

7. Tenant cuts a check of (full) first month's rent to the Realtor and paid on the move in date walkthrough.

8. I got the my first prorated rent for the first 16 days on Jan 2023.

I have incurred $2913.85 of expenses in maintaining and fixing/improving the property since the rental property for immediate move in was posted. I intentionally did not include expenses incurred in fixing my property during my gradual move out for two reasons: a. Some are due to incidents during my stay. b. I read in one of the article that I cannot deduct expenses for preparing the property for the first time rental.

My Questions:

1. Given the context, I only incurred expenses and no income in TY2022. Can I claim these expenses as deduction against my W2 income or not?

2. Can I file these expenses as loses and carry forward to TY2023 and possibly deduct them against my future rental income?

3. I'm doing standard deductions for TY2022 as it is higher than my itemized deductions. Can I take these expenses as loses without itemizing i.e. with Standard deductions based filing?

Description	Date	Amount	Notes
House Cleaning	10/25	276.12	Ed Hacienda Cleaning
Prorated HOA Fees	11/01	37.5	2 months proration of annual fees: $225
Prorated Landlord Fire Dwelling Insurance	11/01	289.33	2 months proration of annual premium: $1,736.00
Prorated Home Property Tax	11/01	1438.76	2 months proration of property taxes: $8,632.60
Rekey Expense	11/02	8.69	KEYMELOCKSMITHS.COM
Rekey Expense	11/02	7.96	KEYMELOCKSMITHS.COM
Paint & Painting Supplies	12/03	45.24	Lowes
White Light Fixtures	11/18	13.51	Home Depot
Handy Man Fixes (fence, microwave, etc)	11/28	75.00	SQ 101 Repairs
Fiber light weight Ladder	11/29	116.16	Lowes
HVAC Winter Maintenance	12/02	134	Local Air Conditioning & Heating LLC
Yard Work	12/10	100	Cash Payment
White Lights	12/11	64.77	Amazon
Utilities (Water, Garbage, Sewer)	12/15	151.56	November: $75.15, December: $76.41
Utilities (Electricity)	12/15	60.22	November: $33.84, December: $26.38
Utilities (Gas)	12/15	86.08	November: $46.58, December: $39.50
Outdoor Faucet Cover	12/17	8.95	Home Depot

[Vanessa A]

1. Given the context, I only incurred expenses and no income in TY2022. Can I claim these expenses as deduction against my W2 income or not? If they moved in on December 16, then you would have 15 days of rental income.  But, yes, you can have a loss on your rental property since it was rented for more than 14 days in 2022 and was available for rent for over 2 months. 

2. Can I file these expenses as loses and carry forward to TY2023 and possibly deduct them against my future rental income?  These expenses would be either used or lost.  You can have a rental loss of up to $25,000 in a year if your income is $100,000 or less for the year. You could use the expenses as they seem to total around $3,000 with a quick look.  If you

3. I'm doing standard deductions for TY2022 as it is higher than my itemized deductions. Can I take these expenses as loses without itemizing i.e. with Standard deductions based filing? Rental expenses are not deductible as personal expenses, they go on Schedule E so it would not affect your ability to take the standard deduction. 

[Fallow]

From IRS Pub 527 : 

Pre-rental expenses. 

You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent.

Vacant rental property. 

If you hold 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. 

Rent. 

If you are a cash basis taxpayer, you have no rent attributed to 2022.

If you use an accrual method, you report income when you earn it. So, if your tenant moved in Dec. 16, you could claim the pro-rated rent in 2022, even though your Realtor paid you in 2023.

[narayananvm]

@Vanessa A Thank you for the prompt response to each of my questions. OK I understood the following:

1. Since my AGI is above $150K, I cannot deduct these rental property losses against my W2.

2. I can file claiming standard deductions but also report rental property losses part of Schedule E.

Followup questions:

1. Yes, tenant occupied my property for 16 days in TY2022. But my tenant paid his full month rent as commission to my realtor directly and I did not receive my first rental property income until Jan 2023. Is it OK to put income as $0 for TY2022 and just add the listed expenses? OR I need to report prorated rent as my income and offset it by adding Commission expense?

2. Can I report these rental property losses in Schedule E and carry forward them to next tax year for offsetting against my future rental income?

Sorry for naive questions, its my first time filing taxes as landlord and I don't want to cross IRS auditors!

[narayananvm]

@Fallow Thank you for sharing references to IRS Pub 527, super useful! OK I understood the following:

1. I can only deduct ordinary and necessary expenses after I make the property available. Since I'm already excluding the expenses I incurred before posting to the MLS and making the property available for rent, I think I'm OK on the list of expenses.

2. I cannot deduct loss of rental income i.e. the time period between 10/22 thru 12/15.

3. I can deduct all of my listed expenses as they fit ordinary and necessary definitions of IRS Pub 527.

4. I should choose cash basis method and thereby will not have any rent attributed to 2022.

Follow up questions:

1. Since I don't have any income in TY2022, against what I can deduct my listed expenses? Will these be the PAL (Passive Activity Losses)? If so, these can be carry forward to offset future rental income, correct?

2. How can I document the fact the first month's rent was paid as commission from the tenant to the realtor? Because, it is not logical to report no rental income when the tenant move in date is set as 12/16/22. Isn't?

[DianeW777]

Yes, you understand 1-4 above.

Yes, this will be a passive activity loss for 2022.  You may be able to use the loss depending on whether you meet the criteria next.  Any amount of the loss that is not used would be carried over to 2023.

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.

• Sign into your TurboTax return > Search (upper right) > Type rentals > Press enter > Click on the Jump to... link > Edit next to the Rental Activity  > Edit next to the Property Profile or General Info > Continue to the question about active participation
• Continue to the end of the section for TurboTax to save your changes.

If the tenant paid  the commission to the realtor (your property manager?) that you were liable for, it is rent to you. If it was your property manager, then you will also have an expense on your rental activity for that expense.

@narayananvm 

[narayananvm]

@DianeW777 Thank you for confirming my understanding and explaining further about the rules. Regarding your response,

"If the tenant paid  the commission to the realtor (your property manager?) that you were liable for, it is rent to you. If it was your property manager, then you will also have an expense on your rental activity for that expense."

OK, I want to clarify that my realtor is not my property manager. I'm maintaining the property myself (as I live within 5 miles of the rental property). I presume, irrespective of my realtor being a one-time agent or on-going property manager, I should file the following:

1. My rental income is full month's rent (even though my tenant paid it out to my realtor directly).

2. I should add that full month's rent value as my commission expense paid to my realtor, thereby offsetting it.

I read somewhere that, the landlord paying the commission to the realtor may have to undergo self-employment tax and that's why realtors take their commission directly from the tenant without involving the landlord. Is this a mis-understanding or it is a fact?

Can you please confirm?

[DaveF1006]

The commission that is paid to the realtor is not a rental expense and is not reported as a rental expense so there is no offsetting entries. Since the real estate commission was not paid out of your own funds, this is income as DianeW777 has stated. This is rental income since it was applied as the first month's rent.

As far as a tenant versus a landlord paying the commission, I cannot locate a verifiable source that attests to this fact thus might be a understanding of the tax law or if this was relayed to you by a non-tax professional. 

Just one last note for your FYI.  Real estate commissions are not deductible rental expenses. instead they are added to the cost basis of your rental house as a buying expense. When you sell the rental unit, Turbo Tax will ask if you had real estate commissions as well as other expense you paid when you bought the house. The answers here will determine your adjusted cost basis for the sale of the house.

[narayananvm]

@DaveF1006 I believe there is a misunderstanding here. The commission I paid to my rental realtor, is for finding a tenant for my rental property and not for purchasing my rental property (as mentioned in the post, I converted my primary residence to rental property during the last quarter of the year). The only caveat is, the check was cut by my tenant directly to my realtor instead of I receiving the rent and then paying off commission to my realtor. I find the following turbotax post and a member post that confirms that commissions paid to rental realtor for finding tenants can be deducted as rental expense:

1. https://ttlc.intuit.com/turbotax-support/en-us/help-article/tax-credits-deductions/kinds-rental-prop...

2. https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/can-i-deduct-commissi....

Thoughts?

[DianeW777]

Yes, they can be deducted on your rental property, and they are also rental income because your tenant paid them directly to the realtor, when in fact it is your rental income.

• Rental income must be included on your rental activity, then is allowed to be deducted as a rental expense because it was a finders fee and not commission on sale or purchase of the property.

@narayananvm 

[narayananvm]

Thank you @DianeW777 @Fallow @Vanessa A @DaveF1006. All my questions are answered!