Rental start up property tax

5 Replies

Purchased a house in 2019 but the rehab / start-up carried into 2020 before being ready to rent.  I understand most of what I've read about capitalizing start-up expenses and the $5000 rule.  I read somewhere, can't find it now, that previous year property taxes are deductible in that prior year (in my case 2019 taxes on 2019 1040).  So far Turbo Tax is resisting establishing this as a 2019 rental, which I understand.  If the property tax is deductible in 2019, does that push it to my personal 1040 Schedule A (itemized deductions), and out-of-luck if I take the standard deduction?  

@Jerald Sander

Of course, talk to a professional...

Basically, your expenses during your rehab, ie before it was ready to rent, go towards to your cost basis. So, once you declare/determine it’s ready for renting, you start depreciating and that’s how you are getting your “deductions.”

While I don't use TurboTax, that's probably why it's throwing a fit at you. You can't make deductions until it's a rental property. The stuff about capitalization/amortization and the de minimus rule applies for when it's a passive investment property, not before it's put into service.

That’s my quick two cents...

Originally posted by @Jerald Sander :

Purchased a house in 2019 but the rehab / start-up carried into 2020 before being ready to rent.  I understand most of what I've read about capitalizing start-up expenses and the $5000 rule.  I read somewhere, can't find it now, that previous year property taxes are deductible in that prior year (in my case 2019 taxes on 2019 1040).  So far Turbo Tax is resisting establishing this as a 2019 rental, which I understand.  If the property tax is deductible in 2019, does that push it to my personal 1040 Schedule A (itemized deductions), and out-of-luck if I take the standard deduction?  

Jerald, startup expenditure from previous years can be deducted in the year when the trade or business activity started. No, it does not go to your Sch A even if you take an itemized deduction. 


 

Thanks for the responses and  I apologize I didn't say so sooner.  I switched away from doing my taxes for a few days to focus on other life things, but am back now.   

This is the information I'd seen elsewhere (TurboTax forum) that made me think Property Taxes are not considered start-up costs and therefore not added to the capitalized basis.  Do you all agree or disagree with the following (I bolded the applicable text)?  If they are expense, and have to be entered to TurboTax as Deductions and Credits, that seems to take me back to the 1040 Schedule A Standard Deduction issue and losing the property tax deduction.  I sent the question back to the TurboTax forum also.  Thanks again for whatever clarification you can provide.   

May 31, 2019 9:29 PM.  All your expenses (except property taxes and mortgage interest if you have one) paid BEFORE the property was listed as available for rent are simply added to the cost of your rental property (in your records). No additional entry TurboTax is required. This includes your "closing" expenses, such as appraisal costs, fire insurance, as well as your repair costs. The total amount is called adjusted basis (not just the cost, but the cost plus all your pre-rental expenses).

Once the property is available for rent, you may start depreciating the rental property and use the "adjusted basis" in the Sale of Property/Depreciation section. You can deduct your property taxes and mortgage interest, in the Deductions & Credits section, for pre-rental time frame. Once the rental is available, they are your rental expenses.


A new post on TurboTax in reply to my question states that property tax and mortgage interest are not an exception and must be included in start-up costs when the property is available for rent. Apparently there are different interpretations, but I've seen this one more than the expense-now position. Here's the other post:

 I am in disagreement with xxxxx

When it comes to long term residential rental real estate, any and all expenses incurred before the property was "available for rent" are just flat out not deductible at all. (do not confuse this with property improvements.) This especially includes those expenses incurred in preparing the property for rent, for that *very* *first* *time* and does not include expenses incurred during vacant periods between renters.

IRS Publication 527 has no allowance for expenses incurred before the property was available for rent. So for rental property there is no such thing as start-up expenses.

Now property improvements are a different story. A property improvement adds "real" value to the property, and it doesn't matter when that property improvement was done either. Property improvements done before the property was placed in service are entered in the Assets/Depreciation section and will have the same "in service" date as the property itself.

Property improvements completed after the property was converted to a rental are also entered in the assets/depreciation section. However, their in service date will be some date "after" the property was originally placed in service.

Long term residential rental real estate income is reported on SCH E with no exceptions. Yes, I said *NO* exceptions.