In my situation how much interest/taxes can I deduct for my rental property?

Question

Hi guys, newbie here.

I purchased a rental property in April; because it took a few months to complete all repairs it wasn't available for renting until September.

Here are my questions:

1. Can I deduct mortgage interest, property taxes and HOA just for the last 4 months? (September-December) or for the all year (since April)?

2. Can I deduct appliances as capital expenses and depreciate them even if they were purchased before September? I bought them in August.

Account Closed · Answer

You can deduct all of your expenses from April.  The rental property will be considered in service in September.  The cost to make the property ready will  need to be capitalized and you can begin depreciating it from Sep of this year.

The appliances are capital expenditures as well and you can begin depreciating them as of Sep using the basis when you acquired them in August.

Tiger M. · Answer

You commentators are an impressive wealth of knowledge, what a great bunch of talent in BP. I appreciate your time to comment and I'm not even asking the question to the post. Just another newbie.

Steven Hamilton II · Answer

Marcin G,

That depends. Typically they do not want to see the property unless we're talking about a VERY high dollar field audit; but they do happen.

They ask you to document every dollar of _________, _________, and ____________ expense on your tax return.  If you don't substantiate one of them, they ask more.

-Steven

Marcin G. · Answer

got it. there are IRS publications that I went thru
http://www.irs.gov/publications/p527/ch02.html#en_US_2010_publink1000219096

In my case the difference in accounting treatment is so immaterial I am not sure they would even want to spend time on it..but who knows

let me asks you what they are asking when the audit actually hits you. do you have to show up with the receipts and a copy of your tax return only? or they are arranging for in-house inspection and you need to point the stove/new ac etc that you bought. thanks

Steven Hamilton II · Answer

[b]Marcin G,

Just because the software let you doesn't mean it is correct.

This is why a landlord should not be using "turbotax".  How can you expect to know what you can and cannot put on each line.

These softwares assume you know the basics. If it is your first time putting in rental expenses you need to do research to make sure you do the right thing.  I bet it asked about capital assets put into service.  You could be looking at some big changes in the event of an audit.

I've been through enough audits that were prepared with turbotax returns to know that it is a waste of time for anyone who invests in much of anything.

The information Steve Babiak told you regarding HOA special assessments is true that the portion of the HOA payments for special assessments must be depreciated. "You cannot deduct special assessments you pay to a condominium management corporation for improvements. However, you may be able to recover your share of the cost of any improvement by taking depreciation." Publication 527 Pg. 16.

-Steven

Steve Babiak · Answer

Well, then you should do some reading on the IRS website regarding depreciation,  That stove is depreciated, but over a shorter period than the rest of the house (unless the stove was part of the house when the house was purchased).  The IRS could audit our returns and disallow some of your "expenses" that should have been depreciated assets.

HOA dues are expenses, but I believe HOA special assessments should be depreciated.  Let's get Dave T, our BP tax nerd, to chime in when he gets a chance.  He knows IRS code better than many accountants, even though he isn't one himself ...

Marcin G. · Answer

Marcin G,

You must capitalize those expenditures per IRS Code.  If you still have one that you are already depreciating you may accelerate the remaining cost between what you dispose of it for and the remaing basis.  In other words if you current basis is $250 and someone pays you $50 for it, you will get the loss for the $200 difference.

hmmm...and there is no threshold that you can apply for FA vs expense ? what you are talking about is treating new stove as an $350 asset and depreciating over time...I always used my deluxe turbotax edition ...and dumped all my expenses along with HOA, taxes etc into year the expenses were incurred... I was never asked by the soft whether I want to expense or capitalize an item. I am depreciating the property over 27yrs ..but that's about it ...

Steven Hamilton II · Answer

Valentin R.,

You certainly can take the real estate taxes as a deduction on Schedule as the taxes on investment property.

If you had not rented the property during the year:
The Interest however; should have been calculated using Form 4952 Investment Interest Expense Deduction. That is where you determine what is or is not deductible in the current year.

Since it was rented:
  You should have included it on Schedule E which would be more beneficial for you.

-Steven

Account Closed · Answer

Steven Hamilton II I ended up adding interest and taxes to Schedule A for the period the house was in repairs. Not sure if that is a bad thing or not. This is the only property I own.

I had only one improvement, an AC unit condenser, which I have added to the basis of the property. I used the improvement ratio to find out the building value and added the condenser price at the end.

Steven Hamilton II · Answer

Valentin R.,

Charles Perkins, pretty much covered most of your answers here.  Yes you can deduct the mortgage interest, taxes, and HOA from April.  You will however, have to depreciate everything else based upon its asset class.

Scott W.,

That is not true. Once the property is placed in service, between tenants if you replace a broken item(small, non capital expenditure such as a fan, switch, etc) or patch a hole that is not to be depreciated, it can be deducted as an expense.

Let me note that there is a difference between a renovation/rehab and tenant turnover.   A renovation is when you are making major repairs/replacement of property.  A renovation would be remodeling a basement, addition, full gut, kitchen remodel.

A turnover situation is when you are simply getting the property ready for a new tenant and not making major changes to the property. (New flooring and paint is not a renovation they are common turnover items.

Now if you are doing a major rehab between tenants, you will depreciate the costs of major repairs such as new drywall, painting(during a renovation rather than turnover), furance replacement, etc.  Other items that are ordinary and immaterial such as the occasional switchplate, outlet cover, switch, that need to be fixed can be expensed. That is the big difference in it all.

Marcin G,

You must capitalize those expenditures per IRS Code.  If you still have one that you are already depreciating you may accelerate the remaining cost between what you dispose of it for and the remaing basis.  In other words if you current basis is $250 and someone pays you $50 for it, you will get the loss for the $200 difference.

I would be happy to clarify any of my responses here if you guys need. I know it can be a confusing topic for many.

-Steven

In my situation how much interest/taxes can I deduct for my rental property?

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