The unit sponsor is going to correct the problem, but it is dragging on and I have been paying maintenance fees, legal fees, utilities, and architect fees.
As I understand some of the purchase fees and the other build-out costs will be added to the cost basis when it is ready to rent, but I am uncertain about all the cost of simply maintaining it - electricity, heat, water, sewer - much of which is in the monthly condo maintenance fee.
This is a commercial condo and cannot be used residentially.
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Rental Property Dates & Numbers That Matter.
Date of Conversion
- If this was your primary residence before, then this date is
the day AFTER you moved out. But in your case, for tax purposes it's treated like a 2nd home for 2016 with no date of conversion reported on the 2016 tax return. On the 2017 return, there will be no date of conversion either. You'll just show your acquisition date, even though it will be in a "prior year" on the 2017 return, and your in service date will be in 2017 as defined above.
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 POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property Improvement.
Property improvements are expenses you incur that 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 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.
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 classified as cleaning/maintenance costs. They are instead classified as startup costs, amortized as such and depreciated over time.
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 classified as startup costs, amortized as such and depreciated over time.
Startup Costs
Please note that if residential rental income is not your PRIMARY business, and your PRIMARY source of income, then your rental business is considered to be passive, and you flat out, no way, no how , are not allowed to deduct your startup costs. Period. The IRS says so. See https://www.irs.gov/pub/irs-drop/rr-99-23.pdf and please take note that rental property produces “passive” income, while other types of businesses produce “active” income. Your rental property is not classified as your “active” business, unless you are a real estate professional, an active participant in the management of the property, and it provides a substantial (more than half) amount of your taxable income for the year. All three requirements must be met. There are no exceptions
Start up costs are expenses incurred while preparing the property for rent, with the express purpose being to prepare it for rent, before it is available for rent. These costs do include repair, cleaning and non-recurring maintenance cost. It does NOT include property improvements. With a normal business that produces active income (rental income is passive) you would amortize these costs over 15 years. But you can’t do that with a rental property. However, you can deduct a maximum of $5000 in startup costs in the first year the rental is available for rent, PROVIDED your total startup costs do not exeed $50,000. This is reported on line 18, “Other Expenses” of SCH E, and should be labeled “start up expenses”.
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.
You can't claim all that stuff until the year the unit is placed in service. For now, you won't even report it on SCH E at all. All you can claim on your 2016 tax return is property taxes and mortgage interest, and that's it. Even though it's a commercial property, you'll deal with those two items in the "Your Home" section under the deductions and credits tab.
You'll enter the 1098 for your primary residence, then you'll enter the 1098 for your "other" property. That will take care of that.
For the rental, if you have mortgage interest and/or property taxes paid that are reported on the closing documents and NOT reported on the 1098, you'll report the property taxes paid that are on the closing document and NOT on the 1098, in the "Other Property" field. on a screen you'll come to AFTER you have entered all your 1098 information.
Note there is a note that says "do not enter rental property stuff here". You can ignore it, because in 2015 this was NOT rental property in any way, form or fashion.
You'll deal with the other stuff on your 2017 tax return next year. Those other expenses incurred (such as maintenance fees for example) will be amortized and depreciated/deducted over time. (15 years I think, but not sure). The amortized costs do add to the cost basis, and you will have to enter them manually in the Assets/Depreciation section, when that time comes next year.
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