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Rental property expenses/depreciation

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Level 5

Client purchased a property for rental purposes. Due to Covid, improvements have been slow and property will not be rented until 2021. 

I ask because I have seen conflicting information. In the past I have waited until income was received to "place" the rental in-service and taken the repair expenses as "prior to in service" expense.  However that was because it all occurred within the tax year.

Now I have a situation where the "rental" was purchased in one year and will not received income until the following year. Can I still file a Sch E and place it in service on date of purchase for purposes of depreciation and expenses incurred in 2020? Are there any exceptions to reporting ex

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Level 5

Thank you Terry....that was the verification I was looking for.

View solution in original post

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Level 15

The question is whether and when the rental property was ready and available?

If it was and your client is able to establish that genuine good-faith efforts were made but there was just no taker, your client should file a Sch E and claim depreciation. 

Having records from your client's agent as to the efforts made and market for comparable properties in the vicinity could be helpful.

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Still an AllStar
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Level 15

Tax treatment for expenses incurred prior to the property being placed in service (i.e. when it was ready and available) is a different subject matter.  More info would help.

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Still an AllStar
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Level 5

I have any info you need...what can I clarify for you?

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Level 15

The answer of whether Sch E should be filed and depreciation claimed should be clear from my original response.  If you're referring to tax treatment of expenses incurred prior to the property being placed in service, more info about those expenses would be needed.

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Still an AllStar
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Level 11
Level 11

There is a lot of misinformation floating around the web saying you can take startup cost prior to in service date, but unless you are a professional realtor your rental is not a trade or business. It is passive investment income, and you cannot take expenses prior to putting in service. You should capitalize all your expenses, and add to basis. If you want to read for yourself see Sec.195, Sec 263A, and Sec.164. Some tax professionals might advise you to treat it as a second home, then you may be able deduct property taxes, Mtg. interest if you itemize, then convert it to rental when it is available for rent.

   

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Level 5

Thank you Terry....that was the verification I was looking for.

View solution in original post

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Level 15

And you give YOURSELF the solve?  Doesn't Terry deserve it, as well as a thumbs up from you?

 

Former Chump... umm.... AllStar.
If a post answers your question, click on *Accept as solution* for future searches
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Level 5

that was accidental...How do I correct it?

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Level 5

This solve belongs to Terry but I don't know how to correct the error.