Filing taxes: when to expense vs capitalize for vacant rental property

[Daniel Loane]

Hi everyone,

I purchased my first rental property in June 2023, and it took until December to prepare it for tenants. I posted the listing on December 12, and my first tenant moved in on December 26th.

As I’m filing my (extended) 2023 taxes, I’d appreciate any advice on what expenses I can deduct and what I should capitalize, especially since the property was mostly vacant. For context, (1) the property was in poor condition when I acquired it, and (2) I’m a passive real estate investor.

Here are my expenses:

• - Travel (~$2,000) and meals during travel ($500)—I understand only 50% of meal costs are deductible.
• - Gardening maintenance (just to prevent the grass from getting too high, not an improvement).
• - In-year tax consultation ($300).
• - Commission to my buyer’s agent ($300).
• - Insurance premium ($1,000).
• - Insurance deductible following a claim ($1,000).

I believe the property won’t begin to depreciate until it’s in service, which seems to align with how TurboTax is set up. If that’s not the case, any clarification would be appreciated!

Lastly, if anyone has recommendations for affordable CPAs in Cleveland or Ohio who could assist me, I would be grateful.

Thank you so much!

[Sean Graham]

Quote from @Daniel Loane:

Hi everyone,

I purchased my first rental property in June 2023, and it took until December to prepare it for tenants. I posted the listing on December 12, and my first tenant moved in on December 26th.

As I’m filing my (extended) 2023 taxes, I’d appreciate any advice on what expenses I can deduct and what I should capitalize, especially since the property was mostly vacant. For context, (1) the property was in poor condition when I acquired it, and (2) I’m a passive real estate investor.

Here are my expenses:

• - Travel (~$2,000) and meals during travel ($500)—I understand only 50% of meal costs are deductible.
• - Gardening maintenance (just to prevent the grass from getting too high, not an improvement).
• - In-year tax consultation ($300).
• - Commission to my buyer’s agent ($300).
• - Insurance premium ($1,000).
• - Insurance deductible following a claim ($1,000).

I believe the property won’t begin to depreciate until it’s in service, which seems to align with how TurboTax is set up. If that’s not the case, any clarification would be appreciated!

Lastly, if anyone has recommendations for affordable CPAs in Cleveland or Ohio who could assist me, I would be grateful.

Thank you so much!

 Hi Daniel, you can still expense the following items out in 2023: travel, meals (50%), gardening, and tax consultation. The insurance premium should be probably be prorated based on in-service date and only expense out that portion. 

Capitalize the buyers commission. 

Insurance deductible for what? If its a repair then expense but if improvement then capitalize.

Deprecation would start 12/26/23 as that’s the in-service date. 

Happy to introduce you to a tax CPA who works remotely. 

Are you doing cost segregation on the property? 






 

[Account Closed]

Quote from @Daniel Loane:

Hi everyone,

I purchased my first rental property in June 2023, and it took until December to prepare it for tenants. I posted the listing on December 12, and my first tenant moved in on December 26th.

As I’m filing my (extended) 2023 taxes, I’d appreciate any advice on what expenses I can deduct and what I should capitalize, especially since the property was mostly vacant. For context, (1) the property was in poor condition when I acquired it, and (2) I’m a passive real estate investor.

Here are my expenses:

• - Travel (~$2,000) and meals during travel ($500)—I understand only 50% of meal costs are deductible.
• - Gardening maintenance (just to prevent the grass from getting too high, not an improvement).
• - In-year tax consultation ($300).
• - Commission to my buyer’s agent ($300).
• - Insurance premium ($1,000).
• - Insurance deductible following a claim ($1,000).

I believe the property won’t begin to depreciate until it’s in service, which seems to align with how TurboTax is set up. If that’s not the case, any clarification would be appreciated!

Lastly, if anyone has recommendations for affordable CPAs in Cleveland or Ohio who could assist me, I would be grateful.

Thank you so much!

Hey Daniel, 

Congratulations on your first rental property! For your 2023 taxes, you can deduct ordinary and necessary expenses, even if the property was mostly vacant.You can deduct the full travel expenses of ~$2,000, while meals are only 50% deductible, so claim $250 for meals. Gardening maintenance, the $300 tax consultation, and the $300 commission to your buyer’s agent are all deductible. Additionally, both the $1,000 insurance premium and the $1,000 deductible are deductible expenses. You’re correct that the property won’t start depreciating until it’s "in service," which begins with your first tenant on December 26th, so you can start depreciation from that date. Keep detailed records of all expenses.

As for tax professional recommendations in Cleveland: As accountants, we are not allowed to promote our services as it is against BP rules. I would strongly suggest you see who is providing value in the tax forums and then reach out to them to see if they are accepting new clients. Best of luck! 

[Regina Blake]

Hi, great questions I would definitely contact the Turbo Tax CPA tax expert department, and they should walk you through the whole process that is included in the program services that you paid for with Turbo Tax.  Also, I am not a tax expert but, you should claim all of your expenses from day one from my understanding there are many costs you can claim because of your expenses. There are also a lot of Accountants and Tax Professionals, CPAs ect. on BP that can give you the right information regarding this situation. If you have any questions, please feel free to reach out. Best wishes!

[Daniel Loane]

Thanks everyone, very grateful for the community and the great info you shared with me! @Sean Graham @Account Closed

[Bill Hampton]

@Daniel Loane

You came to the right place. Since Sean and Zachary have already answered your questions, I will comment on your search for an accountant. 

I recommend finding an accountant who specializes in real estate taxation and tax planning.

You may want to consider working with your accountant remotely to expand your options.

I would also recommend looking for a accountant willing to work with you throughout the year. You want an accountant who can help you strategize and who is responsive when you want to know the consequences of the financial decisions you are making throughout the year.

There are over 20 real estate accountants on this site. Reach out to a few and see who you like and who is accepting new clients.

You can also ask members of your local real estate investors association for real estate accountant recommendations.

Good luck.

[Account Closed]

Quote from @Daniel Loane:

Thanks everyone, very grateful for the community and the great info you shared with me! @Sean Graham @Account Closed

 Happy to help! 

[Andrew Strauss]

Hi Daniel - What i understand is that you had purchased the property but it was put in service from December. In that case any expenses incurred prior to property being put in place, will not be expensed but capitalized. Even depreciation can't be claimed till the property is put in service. That's why you are seeing Turbo tax is also not allowing to claim depreciation unit its put in service.

But you can claim start-up expenses for your rental property upto $5K on your operating expenses. But beyond that you can amortize it.

[Ashish Acharya]

@Daniel Loane For your 2023 taxes, since the property wasn't in service until December 26th, most of your expenses incurred before that date will likely need to be capitalized as part of the property's basis. Here's how to handle the expenses:

• 1. Travel and meals: Since the property wasn't yet in service, these expenses would likely be capitalized into the property's basis.
• 2. Gardening maintenance: This would also be capitalized, as it was necessary to get the property ready for tenants.
• 3. In-year tax consultation: You can deduct this as an expense since it relates to managing your taxes, not the property itself.
• 4. Buyer’s agent commission: This is part of your acquisition costs and should be capitalized into the property's basis.
• 5. Insurance premium: Deduct the portion related to when the property was in service (from December 26th onward). The rest would be capitalized.
• 6. Insurance deductible: This can be deducted in the year the claim occurred, as it relates to property repairs.

You are correct that depreciation begins when the property is placed into service, so it should start as of December 26th, 2023.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Jason Malabute]

Travel and meals (50%) are deductible. Gardening maintenance is deductible as it’s not an improvement. In-year tax consultation, commission, are all deductible. Prorate insurance premiums based on in-service date. For the insurance deductible on the claim, it depends on the nature of the claim: if it’s for a repair, it’s deductible this year; if it’s an improvement, it needs to be capitalized.