Our first tax return, make sure we are doing this right

[Stuart M.]

Hello all,

I am asking about taxes that were due in April 2017 (for 2016 year), filed an extension until now...

So, in May 2016 my wife and I were living in an apartment in FL with our kid and bought our first house in FL. We bought a fixer-upper that needed a roof... Our plan was to put the roof on, then move in in a month or so.

Well...that didn't work out. Basically, when we took the roof off, a ton of other damage was found, the roofers ended up getting fired, the house got drown once, and I ended up doing thousands of hours of repairs (including putting on the roof myself.) And we ended up having to re-lease our apartment, and now my wife doesn't want to move in at all so we are going to rent the house out while we live in an apartment she wants to live in instead.

Anyways, I'm now considered a real estate professional according to IRS rules, and its looks like we are going to be accidental landlords. I'll ballpark it and say we spent 60k in repairs on the house that year, along with the mortgage interest payments, home insurance payments, PMI payments, real estate taxes, water and electricity bills, etc. But the house wasn't ready for rent in 2016 and was never rented. No one has ever occupied the house.

My wife has income of 130k, I have no income, I just work on the house. As soon as its ready, it will be rented. Yes, its been under construction for a year now.

As far as I can tell, I might not be allowed to deduct anything for 2016 (over 50k startup and still not ready for rent.) But here's the list of expenses we've incurred, I just am wondering what gets added to the basis, what can be amortized over the 15 years when its finally ready, what can be put in the $2500 asset bucket for immediate expensing, and what I am taking as a total loss. And do I have to wait until its rented to start depreciation/amortization? (How does it work that I have startup expenses over 2 tax years - 2016 and 2017?) Can I deduct anything for 2016?

Mortgage Interest

Home Insurance

PMI

Real Estate Taxes

Utilities

New Roof

Rental Trucks (I have no car, we share)

Gas/Tolls

Electrical/Plumbing

Drywall, Drywall Labor

Insulation

Doors/Trim/Paint

Lawn Service

Tools

Tool Rentals

[Linda Weygant]

Start Up Costs are not the same as costs incurred to put your asset into service.  Start Up Costs would be things like Market Research, Legal Fees to put together an entity or to purchase an existing business, consulting with a CPA prior to starting business, etc.  

Being a real estate professional does nothing for you in your case.  This issue comes into play when you are looking at being able to write off passive losses when your AGI is greater than $150,000.  You have neither loss nor income since your asset is not in service.

If your asset is ready to be placed into service (is habitable), then yes, as soon as you place the ad and deem it ready to be placed into service, you could then look into whether or not your upgrades are eligible for the $2500 De Minimus Safe Harbor Election.

You cannot rent a house that is not habitable, so if your remodel is such that there is no working bathroom, no working kitchen, no available heating, windows and exterior doors missing, etc., then no ad in the world is going to make your asset "in service".  Even assuming somebody would live in a construction zone, if the house does not meet the legal definition of habitable, then this would not qualify.