Repair Regulation Regulations - This is where you let the IRS know how you will be treating your repair expenses ($2,500 or less) that are for the "betterment, restoration or adaption" of your property.
---Q: Should you deduct these expenses in full (100% deduction in 2019) or over time (capitalizing with depreciation over multiple years)?
---A: That depends on your overall tax strategy, overall income and tax situation (there are other rules limiting your overall deductible loss from rentals based on your income, other passive investment activity, etc). The good thing about this election is that you can choose to take it one year, opt-out the next year, then opt-in the year after--you decide every year by taking or not taking the election. Capitalizing adds to your basis, which could lower your taxable profit/capital gains tax if you are planning on selling in the near future. Capitalizing basically means you take deductions on those items over multiple years (instead of all at once in 2019). If you expect your taxable income (from other sources) to go up in future years, those deductions may save you more money if taken over time instead of all in year 1. So for this one it really depends.
No intention of selling for the foreseeable future. This is intent to be a long term rental properly and part of my retirement cash flow strategy. The mortgage will be paid off in ~6 years; it should conservatively cash flow $1000 per month. My timeline to retirement is 7-10 years.
I expect Taxable Income to be flat or increase until retirement.
My repairs and maintenance costs for this year were $2437.47. I cashed out a brokerage account and have a Capital Gain of $1362. If I choose to capitalize the expenses, can I offset the capital gain or is it only on the selling of the home?
Mortgage Costs - To be safe I would only take only the mortgage interest and real estate taxes from the date you placed it in service (March 15-December 31). The mortgage interest and real estate taxes you paid from January 1st through March 15th would be deductible on Schedule A if you are itemizing-I know most people are now using the standard deduction so those may not help.
I made the Tax Year 2018 payment in Jan 2019 then Tax Year 2019 payment in Dec 2019. To confirm, the Jan 2019 payment will not count if it was not yet placed in service - correct?
Amortization - This can be taken on those closing costs (see your 2011 Closing Statement) such as appraisal, inspection, title fees, loan origination fees, recording fees. Taken over the life of the loan, if you sell the property in let's' say 10 year, you will be able to deduct these in the year of the sale, so be sure to keep track of these. Are you including these in your depreciable cost basis? Some tax returns that I've seen include these as acquisition costs for depreciation basis instead of taken as amortization over the life of the loan. This doesn't make a huge difference to the bottom line (taking it as depreciation over 27.5 years vs. taking amortization over the life of the loan, usually a standard 30 year mortgage). Just make sure you are not double-dipping (taking the same deduction twice)!
I am not currently including them. I found my closing statement and my fees were $3,963.81. I could add these to Amortization?
I did refinance in 2016 (unable to located that closing statement digitally) but if I can, could I include those to Amortization as well?
Depreciation Questions:
Cost Basis - The IRS says the use the LESSER of Fair Market Value or your Adjusted Cost Basis (Fair Market Value - "This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property." -from IRS Pub. 527). So you should only use the fair market value if it is lower than your adjusted basis.
Fair market value is close to $100k higher than what I paid in 2011. Good problem to have I suppose.
I can only see Assessed Values on the Tax website back to 2015. I emailed them requesting 2011. I found 2010 in my closing documents:
LAND 26,000
IMPROVEMENT 89,100
TOTAL VALUE 115,100
Which puts the land value around 22.5% so I could use that ratio x Purchase Price?
One thing I must tell you to keep in mind for the near future, is that if you lived in the house for for 2 years out of the last 5 years (from the date of your a potential sale), you may qualify for an exclusion of $500,000 in profit if you sell that property. There would be a small depreciation recapture on the depreciation taken while you have it as a rental (Years 3-5) but other than that, this could mean a huge tax savings specifically for taxpayers who sell their primary residence at a gain, the proceeds can be used for investing in other properties, or anything else. This could potentially be a tax SAVINGS, different than a tax DEFERRAL (such as a 1031 exchange).
Just something to keep in mind as you get closer to that date and have to decide whether you want forego that savings to hold it long term, or sell it and use the proceeds for another property or multiple properties, etc.
I am aware of the 2/5 year rule. I plan to evaluate closer to that 5 year mark but as mentioned above, my intention is to hold and operate as a rental for an extended period of time. Is the rule calendar year or to the date of being your primary residence?
