Claiming Expenses on SMF During Tax Season

Member since 2023 · 42 posts · 28 votes

Hello everyone! Question regarding my first rental property and taxes. I purchased my first rental property (4plex) back in July that’s taken a lot of expenses; down payment, inspection, repairs, rehabs, etc.

From my understanding since it’s a rental property I could use this against my income during tax season. However it is a homestead loan so I’m wondering if that changes anything. I haven’t personally homesteaded yet due to how disgusting the place was and all the work/money that’s needed to be put into it to get it livable.

Can I still claim this on my taxes? 75% of it is being rented so it is very much a rental property. Any info on how to handle taxes this season would be greatly appreciated. Thanks!

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Aaron ZimmermanBusiness Member

Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes

Adding to what Katie and Tim’s great comments.

On the house hack, you can divide common expenses by square footage or bedrooms, whichever is more advantageous.

Down payment is not deductible. However, you can depreciate your property once it’s placed in service. Placed in service date is when units were available to be rented. So if you have one unit advertised for rent on 6/1, another on 8/1, and another on 10/1, this will affect the depreciation % on the tax return.

Repair vs capex: capex would typically include all costs prior to the property being placed in service INCLUDING mortgage interest, insurance, property taxes, utilities, etc. Repairs would generally be for costs <$2,500 using the de minimis safe harbor.

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Tim DelaneyPro Member
Buffalo, NY · Member since 2018 · 790 posts · 530 votes
1y
I am not a tax expert, but here are my thoughts. The loan on a property shouldn’t factor into the taxes. The three units you are renting out are investment properties, if they were put into service this year then you can deduct your expenses on them, but not on your unit. So if those three units are 75% of the square footage then 75% of the closing costs and mortgage interest and taxes would be considered business expenses. Make sure you understand the difference between capital expenses that get depreciated over multiple years and regular expenses that get deducted immediately. If you have not put them into service yet then you may want to hurry up and do that otherwise you’ll have to wait until next year. There are also limitations of how much total loss from RE you can take against your W2 unless you are a RE Professional. If you are uncertain about any of this I would recommend spending a little on a CPA that understands RE investing.
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Brett Riemensnider
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Member since 2023 · 42 posts · 28 votes
1y
Quote from @Tim Delaney:

I am not a tax expert, but here are my thoughts. The loan on a property shouldn’t factor into the taxes. The three units you are renting out are investment properties, if they were put into service this year then you can deduct your expenses on them, but not on your unit. So if those three units are 75% of the square footage then 75% of the closing costs and mortgage interest and taxes would be considered business expenses. Make sure you understand the difference between capital expenses that get depreciated over multiple years and regular expenses that get deducted immediately. If you have not put them into service yet then you may want to hurry up and do that otherwise you’ll have to wait until next year. There are also limitations of how much total loss from RE you can take against your W2 unless you are a RE Professional. If you are uncertain about any of this I would recommend spending a little on a CPA that understands RE investing.

Fantastic advice and kinda what I was thinking. I will definitely do a little more research and make sure that whoever is doing my taxes this year knows their thing about real estate as well. Thanks for the comment Tim!
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Brett Riemensnider
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Member since 2023 · 42 posts · 28 votes
1y
By the way, 3 of the 4 have been rented since I owned the property so yes I suppose the 75% rule could apply then.
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Katie RippBusiness Member
Accountant · Scottsdale, AZ · Member since 2020 · 31 posts · 38 votes
1y
@Tim Delaney hit in on the head here! If the property is in service then it’s reported on your 2024 tax return. Since they have been rented out, it’s in service.

Definitely recommend reading up on or talking with a CPA on what expenses can be deducted as a repair and what has to be capitalized, as that will affect possible losses.
Depending on if you qualify for the special allowance for active RE, you may be able to take up to $25k in losses (unless you are full time in real estate and may be able to use real estate professional status).
Homestead loan won’t affect any of this.
Recommendations for you would be to keep super meticulous records of all the costs you’re putting into the property, so your tax pro can make sure you’re capturing everything 1) correctly and 2) in the most tax advantaged way.
When you do move in, it will be important to separate out direct and indirect expenses. Indirect expenses are expenses for the entire property that are 75% deductible (ex: property tax, insurance, mortgage interest). Direct expenses are expenses directly attributable to the rental units (ex: rental unit repairs/cleaning, advertising, rental adm exp, etc)
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Aaron ZimmermanBusiness Member
Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
1y
Adding to what Katie and Tim’s great comments.
On the house hack, you can divide common expenses by square footage or bedrooms, whichever is more advantageous.
Down payment is not deductible. However, you can depreciate your property once it’s placed in service. Placed in service date is when units were available to be rented. So if you have one unit advertised for rent on 6/1, another on 8/1, and another on 10/1, this will affect the depreciation % on the tax return.
Repair vs capex: capex would typically include all costs prior to the property being placed in service INCLUDING mortgage interest, insurance, property taxes, utilities, etc. Repairs would generally be for costs <$2,500 using the de minimis safe harbor.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
1y
@Brett Riemensnider You can claim expenses related to your rental property, even with a homestead loan, by allocating costs based on the 75% rental usage. Deductible expenses include a proportional share of mortgage interest, property taxes, insurance, utilities, and repairs. You can also depreciate the rental portion over 27.5 years. While down payments and principal payments aren't deductible, inspection fees and other acquisition costs can be added to the property’s basis for depreciation. Expenses for initial repairs before renting are usually capitalized and depreciated. Talk to your tax advisor about how to release your passive activity losses based on your situation.

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