Rental Property - expenses from last year

[mstelick]

I purchased a house in 2021, but did not start renting it out until 2022.  I was told I could still use the expenses in 2021 on the 2022 tax report once I start renting.  We fixed up the house by painting all the rooms, the exterior windows, and fixing the shed.  We also fixed some electrical work.  We also paid taxes and insurance on the house in 2021.  Are we able to expense these costs in 2022, now that we are finally renting the home in 2022?

[KristinaK]

You can start expensing the costs incurred from the date the property became available for rent. Even if it was not rented yet. However, all prior expenses will have to be added to the basis of your property and then depreciated. 

[mstelick]

How do I calculate the basis of the property.  We purchased the property with cash.  Can I depreciate the cost of the house, closing costs and all the expenses we paid to get the property ready for renting, including taxes we paid last year?  How many years do I depreciate this basis cost?

[KristinaK]

Your cost basis is the purchase price, plus any improvements. Include repairs prior to placing the property in service (making it available for rent), and less depreciation (at a later stage when you start taking it). 

You can absolutely depreciate the cost of the house and all I've mentioned above. Closing costs will have to be amortized. It may sound scary at this point, but TurboTax will walk you through all these details by asking questions along the way. 

Taxes paid can actually be deducted on your Schedule A, if you itemize. Otherwise, include them with the cost basis. 

And a very good question about the number of years for depreciation. Residential rental is depreciated over 27.5 years. However, if you've done Land Improvements, then those are depreciated over 15 years. If you added appliances -- those are depreciated over 5 years. And TurboTax will ask you all these questions. Your job is to keep track of the expenses so you can separate one type of purchase or cost from another, and then enter that information in TurboTax.

We have a number of amazing Help Articles on the topic of rentals. Here are some of them. I suggest you read through them and come back with more questions any time you have them. We are here to help. 

@mstelick 

What is the definition of cost basis?

How do I handle capital improvements and depreciation for my rental?

Should I report my rental on Schedule E or Schedule C?

What is rental depreciation and how does it differ from an expense?

What kinds of rental property expenses can I deduct?

 

[Hal_Al]

"Real estate start up costs that exceed $5,000 must be amortized. "Amortize" is a fancy word us accountants use that really just means "depreciate" or recovery of your costs. The major difference is that you amortize intangible expenses and depreciation tangible expenses.

Prior to buying a rental, all of the qualifying real estate start up costs you incur will be added to the basis of your new rental. There is one minor exception to this rule: you can deduct up to $5,000 of your real estate start up costs in the year that your rental is placed into service.

The excess amount of real estate start up costs over $5,000 will be amortized over a 180 month period. So each month, you will get to recover some of your start up costs for 180 months.

As an example, let's say you incur qualifying real estate start up costs of $6,000. You can elect to deduct $5,000 in the year your rental is placed into service. The remaining $1,000 is spread out over a 180 month (15 years) period and slowly recovered. You don't have to make the election to deduct $5,000 and can instead amortize all of your start up costs.

Now for some fancy talk. To make the $5,000 deduction election, you must attach a statement required by Regulations sections 1.195-1(b), 1.248-1(c), and 1.709-1(c). The statement will have an itemized listing of the start up costs you are electing to currently deduct. Another good reason to keep excellent records of your expenses".

Reference: https://www.therealestatecpa.com/blog/real-estate-start-up-costs