Can I deduct expenses from years ago?

Question

Hi all,

Here is my situation:  I lived in a house for 2 years and I'm now renting that house out.  I plan on doing the same with the house I just moved into.

My question is:  If I made improvements or fixes to the propery during the time I was living in it, can I depreciate the improvements and deduct the expenses 2 years later, now that it's being rented out?  As far as depreciation goes, can I depreciate the whole amount, or do I have to start depreciating as soon as the improvements are made, losing 2 years of depreciation.  Thanks for your responses!

Nathaniel Busch · Answer

Account Closed

You are permitted to carry forward your adjusted basis in the property into the year in which you first put it into service.

However, the total depreciable amount is the lesser of Fair Market Value or your adjusted basis. So if the property's value has declined, you will need to reduce the depreciable basis of each of your components pro rata until your total basis equals FMV.

Nathaniel Busch, CPA

Jon Holdman · Answer

Anything you do to a rental property to get it rent ready gets added to the basis.  Those expenses are not deductible at all.

But anything you do to the property while its your residence is probably not deductible at all.  Repairs, and painting would fall into that category, aren't deductible at all.  Capital improvements, like adding a room, would add to your basis.  When you convert the property to a rental, though, the basis, as @Nathaniel Busch says is the lesser of the fair market value or your basis.  So, if you did a capital improvement while you were living there it would increase your basis.  That would increase the starting basis when you convert it to  a rental.  But if you made repairs, then those have no effect.

So, if you paint while you're living there, no deduction.  If you paint after you move out but before its rent ready, it adds to the basis.  If you paint after its rent ready, then it would be a deductible expense in the year you did the painting.  If that was a prior year that you've already filed your taxes for you would need to file an amended return for that year.

As always, you should discuss the details of your situation and return with your accountant.  If you've been doing taxes with turbo tax or some such, now is the time to find an accountant.

Account Closed · Answer

@Jon Holdman

That was a very clear explanation and really helped me to understand.  You're right about getting a CPA, and I'm looking for one now.  Thanks for your response!

Account Closed · Answer

@Nathaniel Busch

That's helpful, thanks.  What about expenses?  For instance, I painted our new house in order to get rid of the cigarette smoke smell.  I'm currently living in the house with my family.  If I rent the house out 2 years from now, will the paint expense be non-deductible since I purchased it in a previous tax year?