Rental Expenses decrease my federal refund?

[ajmomof4]

We have a rental that we had to renovate after the tenant moved out without notice. We collected 10 months of rent and had a lot of expenses to get it in good order. I have all of the expenses categorized, organized, and totaled, and when I put them in Turbo tax I noticed that my Federal Refund went down every time I put in the next category. 

At the very end it said that I did not get credit for all of the expenses because the rent was below median market rent for the county. I went back through and removed all of the expenses, and my refund went up by almost $300. I have never had this happen before. Yes, we had 2 fewer months of rent, and it was a little below market rent because we had the same tenant for many years. However, when I expense nothing of the renovations, I have a higher refund? 

[ThomasM125]

You may be entitled to an earned income credit. That can go up when your income increases and if it is more than the tax on the additional income, your refund can increase as you mention. You can look on line 27 of your form 1040 to see if you have an earned income credit.

To view your form 1040 and schedule 1 to 3:

1. Choose Tax Tools from your left menu bar in TurboTax Online
2. Choose Tools
3. Choose View Tax Summary
4. See the Preview my 1040 option in the left menu bar and click on it
5. Choose the Back option in the left menu bar when you are done 

[ajmomof4]

Thanks for your response, but we don't qualify for EIC. This is for an investment rental property that had a tenant only part of the year, and we had to spend a significant amount of money to repair the property after he left. Why does itemizing my repair expenses cause my Federal refund to go down?

[DianeW777]

It can be normal for the refund to go down.  First, you are carrying the depreciation before you put anything else in, then you enter the income and all the expenses which can cause a reduced refund.  $300 doesn't seem unreasonable.

When you go through the Property Profile or Rental Property Info there is a question about renting at fair rental price - you must answer Yes.  Do not consider the months the property was not rented.

If you had significant amounts of money used to improve the property, I would ask if it was a capital improvement or simply repairs.  A capital improvement would be new siding, a new roof, structural changes that have a long life.  If so, this may need to be listed as an asset and depreciated the same as the rental home itself.  

There is a Deminimis Safe Harbor that you might qualify for if it was a capital improvement.  I will provide the details but it's not likely this will change your results if you listed everything as a repair.

Improvements Election

This election is an option you can take each year that lets you write off some building improvements as expenses instead of assets.

Here are the rules you need to meet to take this election:

• Your gross receipts, including all your other income, are $10,000,000 or less.
• Your eligible building has an unadjusted basis of $1,000,000 or less.
• The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits: 
  • 2% of the unadjusted basis of your building or
  • $10,000

This election for building improvements is called the Safe Harbor Election for Small Taxpayers. If you decide to take this option, a form called Safe Harbor Election for Small Taxpayers will show up in your tax return. This election will apply to all your businesses, rental properties or farms.  It is listed under Miscellaneous Expenses if you qualify.

                     

Lastly, if you would like to send us a “diagnostic” file that has your “numbers” but not your personal information it would help.  If you would like to do this, here are the instructions: 

TurboTax Online:

Go to the black panel on the left side of your program and select Tax Tools. 

1. Then select Tools below Tax Tools. 
2. A window will pop up which says Tools Center.  
3. On this screen, select Share my file with Agent. 
4. You will see a message explaining what the diagnostic copy is.  Click okay through this screen and then you will get a Token number. 
5. Reply to this thread with your Token number and your state. This will allow us to open a copy of your return without seeing any personal information.  

TurboTax CD/Download:

If you like, you can send a copy of your return that will be scrubbed to eliminate your personal data by using these steps:

1. Click on Online in the top left menu of TurboTax CD/Download for Windows
2. Select 'Send Tax File to Agent'
3. Write down or send an image of your token number and state then place in this issue.
4. We can then review your exact scenario for a solution.
5. Please also tell us any states included in the return. This is necessary for us to view the return.

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution. 

@ajmomof4