Repairs & Maintenance Deduction on First Rental?

Question

Hello!  Last October I moved from my former home and am now renting it out (to my daughter and her boyfriend).  I understand that I can deduct repairs and maintenance, though not improvements.  My question is, does that begin from the moment it became a rental or is there a "lookback" period, allowing me to count prior repairs & maintenance for a certain amount of time?

Steve Wright · Answer

Ah, thank you, David!  I'm glad to know there's a defined line for what's acceptable when renting to family (though my daughter's boyfriend isn't family... yet 🙃).  80% of $1,600 is $1,264 which is less than the $1,350 I am charging them (I stated $1,300 previously but remembered it's actually $1,350).

Honestly, this year, repairs and maintenance are very minor, but all of this information is good to know going forward.

Michael Plaks · Answer

@Steve Wright

If it is really a rental property, then capital improvements made to it (once it is a rental) are also deductible, but slowly via depreciation and not right away.

The more important issue is whether you HAVE converted it to a rental property. It only happened if your daughter and her boyfriend are paying you market rate for the property. If you're charging them a friendly family rate significantly under market - it is a personal use property, and no expenses are allowed other than mortgage interest and property taxes, and those may be useless anyway.

Kelly O'Keefe · Answer

The period you can begin to deduct expenses  starts when it was "placed in service" this means when it was listed as available for rent. Was the property vacant prior to October when she moved in?

Jake Baker · Answer

@Steve Wright

Here is a great resource for understanding rental property deductions: https://www.irs.gov/publications/p527

David Orr · Answer

It's true that "fair market rent" is a vague concept and there are a lot of factors involved.  But we know a fair amount about what you can and can't get away with on this topic, because there have been tax court rulings over this issue.

You are allowed to consider things like the location, condition of the house, and even needing to reduce the rent because it's difficult to find tenants during a particular time of year.  And also this... the tax courts have allowed rent for family members to be discounted up to 20% under fair market rent because it's reasonable to accept a little less from a family member who might likely take better care of the house (reference: Bindseil v. Commissioner T.C. Memo 1983-411).  So there you go, that should make $1300 permissible if the fair market rent is $1600. David OrrTax Modern

Steve Wright · Answer

I disagree.  I am making a profit off of it and the property is indeed a rental property, meaning there are no "personal use" days and it's registered as a rental with the city and I am registered as a business as well.  I am paying additional taxes on the rental income, as well as business fees.I assume this is the part of the tax code we're referring to: https://www.irs.gov/taxtopics/tc415, and this is the line:"A member of your family or of a family of any other person who has an interest in it, unless the family member uses it as their main home and pays a fair rental price."

It is their main home, but the "fair rental price" is debatable. To be specific, they pay $1,300 a month when I probably could get about $1,600, though I do not know for sure, as last year was the first time it was rented. I would also argue that there are plenty of landlords out there that have rentals which are currently below market rental price.

I assume that this part of the tax code was created to prevent those with multiple homes from letting relatives live in one for almost free, while potentially hiding that rental income and not having it registered as a business and pocketing the money.  In my case, I'm following all the rules of a rental property, along with taxes and fees, but I am giving them a slight discount.  I am making a profit, but not as much as I could, as this was a good way for me to ease into the rental business.

Michael Plaks · Answer

@Steve Wright

While we're conditioned to complain about "government logic", there is actually logic in this case. You get tax benefits for operating a business, and business assumes a profit motive. Letting your family use your property is your personal choice that has no profit motive, hence no tax benefits.

Steve Wright · Answer

Oh geez.  Yes, I charge them a few hundred less than what I could get for it.  For me, it was my way of easing into the rental business and also a way for them to start living on their own.

So I get less income than I could AND I lose tax breaks?  Sounds like government logic to me 🙄.  They plan on being there for maybe another year or two.I had never heard of a "personal use property", so I'll have to look into it and see this qualifies.  I am using TurboTax for my taxes, BTW.  So this is the first year where a rental is in the picture.Part of me wishes that I hadn't asked about repairs and maintenance and would have remained blissfully unaware of this part of the tax code, LOL.

Steve Wright · Answer

Thanks Kelly.  I thought that was probably the case, but just wanted to be sure.  I was living in it right up until the point it turned into a rental.  In truth, my daughter and her boyfriend were living with me at the time, and I bought another home and moved out.

Repairs & Maintenance Deduction on First Rental?

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