Taxes on Converting Home to Rental

2 Replies

Listed my home about 6/12. Have someone about to sign a lease but realized that an extra bathroom my wife and i have not hardly used has issues needing pretty signifcant repairs. We are moving to new residence July 1, insurance becomes landlord policy July 1, and then having tenant move in July 15. If I wait to do repairs until after July 1, can I deduct them? Or if I did them now could I deduct since it is listed? Or no since the damage / wear occurred while still residence? Also if I were to convert it back to a residence at some point, would there be any recapture? Thanks!

OK, first off, I'm not a lawyer and I'm not an accountant. Take that into account.

My advice is to fix the problem NOW and when you do you taxes, put down that you put the unit into rental service on June 12, 2019. It doesn't matter that the tenant doen't move in until Christmas 2020, what matters is the unit was available for leasing.

Consider, for example, you put the house up for rent in January. You advertise it's available. That house is officially a rental unit in January. OK, you're living in it now, but you intend to rent it out, evidenced by the advertising. OK, the toilet explodes in February. The repairs are a deductible business expense. You finally find a renter who signs the lease in March. Great, now you have rental income to put on your tax form.

The rest of your questions (recapture? you have a profitable enterprise, why would you want to move back in and ruin that?) probably require a tax accountant (which, as I said, I am not)

@Sean Smith

While not an accountant himself, @Alvin Sylvain gave you an accurate and well articulated answer. 

One technical detail: depending on the scope of the work, this may be a deductible repair, or it may be considered an improvement that has to be slowly depreciated instead of deducted. If it's under $2,500 - then easily the former. Over $2,500 - it depends. But either way, it is linked to your new rental business.

Tax consequences in the future can get complicated. If you sell within the next 3 years without moving back in - you will likely avoid all capital gain taxes (if under $500k) and will only have to recapture depreciation taken over the next 3 years. Because of depreciation recapture, it does matter how you treat these repairs, so it's best to consult an expert.