Rental property, repairs througout all of 2023. 2024 now ready to rent out. Tax deductions?

Hello.

I've acquired a condo which I will rent out. All of 2023 I was doing repairs (painting, installing shower etc.) and replacing kitchen/dishwasher and entire unit's floor. No income for me except for SS during 2023. All work paid for using savings.

Improvment? Repairs? Both?

So I didn't get income from that property during 2023. It is now on the market waiting for occupants. I am also a licensed real estate broker.

What can I qualify for in tax savings or carrying forward tax savings?

What forms do I need?

Thank you and have a splendid day.

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Comments

MatthewD

Hello,

Generally, when you make improvements to property prior to putting it into service you capitalize the costs of the repairs etc. In other words, add that to your purchase price to arrive at your Adjusted Basis.

Some costs can be added as a separate new asset, and you can use Bonus Depreciation on them in the year the rental is ready for rental. For example your new flooring and dishwasher. That can provide some savings in the first year the rental is ready to rent.

See IRS publication 527 for more information on Capitalizing vs expensing.

If you actively participate in the rental, that can help if you have losses that may be limited for the Passive Activity Limits. However, not many people may qualify as a Real Estate Professional, even if you have an active real estate license. Carefully read what the IRS has to say about a Real Estate Professional.

Report your rental activities on Schedule E: Supplemental Income and Loss.

jeffschips

MathewD! Thank you so much for that very useful information. I am greatly appreciative of your knowlwedge.

I am curious about the Bonus Depreciation - you are saying that now, when the unit is ready for rental, I can somehow get some benefit. Can you elaborate a bit more on that - i.e., what forms are needed for such a use and any other tidpits you would like to add here.

Thank you again for your time and expertise!

jeffschips

Perhaps this info will help: I spent about 17k renovating a condo that I inherited in 2023 so that I can start renting it out in 2024. All that work was done in 2023. It is now 2024 and I must do my taxes. I had very little income in 2023 as I was spending all my time renovating this property. From an accounting perspective I'm torn on what to do as I'm rather elderly and waiting 15 years to capitolize all that work seems pointless. I'd rather somehow benefit from it earlier in life. Any proverbial. advice? I understand anything you suggest is just an opinion and not professional advice. Thank you.

KristineS

https://community.freetaxusa.com/discussion/comment/1760#Comment_1760

Hi jeffschips,

Now that your rental is up and running in 2024 you may depreciate new items you add to the house. For example let's say you put in a new dishwasher in May 2024. This may be depreciated over time and/or be used in conjunction with bonus depreciation to claim a larger portion of the expense at once rather than over the course of it's regularly scheduled depreciable life. That new dishwasher will be reported on your 2024 tax return next year in calendar 2025. Our software will prompt the question and you may choose bonus depreciation or not depending on the asset. No additional forms are needed.

The $17k you spent in 2023 to improve the rental is now added to the basis (original cost) when you begin renting in 2024. Example: if the property cost $200,000, you'll add the $17,000 spent on improvements to equal $217,000 as your new adjusted basis. The software will prompt you to enter the value of the land in a separate entry because land (dirt, trees, etc) does not depreciate. Rental property depreciates over the course of 27.5 years.

jeffschips

Thanks for that very appreciated. But I won't be alive in 27.5 years so I'm looking for the best "up front" type of tax benefit I can get.

Suggestions?

KristineS

I'm sorry, but there's no workaround for the 27.5 years on a rental property.

jeffschips

Well, it's not rented yet only made "ready" to rent with improvments and repairs which were finished in 2023. It's now 2024. If I choose to sell in 2024 I can however take advantage of the adjusted basis can't I? I guess my confusion is in the overlapping "benefits". I guess you can do both - increase your basis based on improvments AND toll out the improvments as capital improvments as years proceed forward, until you sell?

That seems like the only path forward for me although someone also mentioned Bonus Depreciation. . .

jeffschips

The helpful information here is different than what I'm seeing here:

https://huddlestontaxcpas.com/tax-guides/rental-property/deducting-startup-expenses

Where they say you may amortize the amount over 180 months (15 years).

Please note that the unit was never placed into service as a rental. It is ready now but during 2023 I was doing the construction work and renovation and fixing. Maybe that makes a difference?

KeriC

The link referenced above shows the following startup expenses as eligible for the 15-year startup amortization but doesn't include improvements to the property.

As @KristineS mentioned previously, you will need to depreciate the improvements as residential rental property, even if you don't expect to own the property for that many years.

jeffschips

Aha! I see now. One benefit is limited to just Legal and accounting, inspection and appraisal, marketing and advertising, loan origination fees and that's it up to 15 years, whereas the others are 27.5 years and limited to captial improvments.

Am I right on that?

I got it but everyone over 65 needs to push for reducing that 27.5 and 15 to something that comports with the aged not everyone who invests in real estate is in their 20's.

MatthewD

Hello,

Yes, that is right. Just keep in mind that depreciation is based on the useful life of the asset, not the remaining life of the owner. :)