Can I deduct expenses incurred prior to listing my STR?

Question

I purchased my property in October 2018... however I did not list it on Airbnb until January 2019...therefore I had no rental income in 2018.

Can I still deduct expenses such as mortgage interest, property taxes, depreciation, etc. for my 2018 return?

I understand I cannot claim these losses against my other income but was wondering if I would be able to carry them forward to offset future rental income.

Thanks.

Nicholas Aiola · Answer

@Patrick McCabe @Benjamin Enriquez

The key date in question is the "in-service" date. That just means when the property is ready (in liveable condition) and available (advertised) for rent.

Most operating expenses incurred before the in-service date are added to the property's basis and depreciated over it's useful life, as @Lisa Graesser said. Therefore, you're out of luck re: depreciation in 2018.

However, you may be able to deduct some expenses as start up expenses when business officially "begins", which will be in 2019; you also may be able to claim some expenses (taxes and mortgage interest, namely) as second home deductions in 2018, before the property was placed in service as a rental.

Keep in mind, if you inherit tenants, the property is placed in service immediately on the date of closing, even if you kick them out the next day. Idle time between tenants does not remove the property from being in service.

Lisa Graesser · Answer

I am not an accountant, but my understanding is that you have to add the expenses incurred before offering for rent to the cost basis and depreciated, not deducted. You should be able to deduct a certain amount as start up costs. Good resource is of course an accountant but read the books "Tax strategies for the savvy real estate investor" by Amanda Hann and Nolo's "every landlords tax deduction guide" and "Tax guide for Short-Term rentals"

Nicholas Aiola · Answer

@Tom ONeil Those expenses are deductible in theory but, as I mentioned in my response above, you cannot deduct most expenses until the property is placed in service. An analysis should be done as to when and where to deduct certain expenses before the in-service date, if at all.

@Patrick McCabe cannot deduct depreciation in 2018 because his property was not placed in service until 2019.

The question has been answered to the best of all of the responders' abilities with limited information at hand. As with most tax subjects, the answer is typically "it depends" until we get our hands on the full details.

Sincerely, an accountant :)

Lisa Graesser · Answer

The furniture you buy before your rental is offered for rent will need to be added to the cost basis of the purchase of the rental and depreciated over 27.5 years. If you can offer the house with old furniture then buy the furniture after you have offered it for rent then you may be able to deduct it in the same year, depending on the cost, there are new rules this yax year. You should talk to an accountant and read the books I mentioned before. It will help you understand and be better prepared when it comes to planning and paying your taxes on rentals.

Tom ONeil · Answer

@Patrick McCabe I'm not an accountant but I don't see anyone answering your actual question.

Yes, you can claim those expenses you mentioned (ITI and depreciation) as losses against that property. Since you have no income to deduct those expenses from, they will be carried forward to future years (carry-over losses). The way my accountant explained it to me is that each property is more or less considered and individual business so losses will carry forward until you sell (or they are offset by gains). When you sell, any carry over losses that remain can be deducted from your overall income for that year.

Again, check with an accountant, but that is how mine explained it and what was done when I experimented (and completely failed) with a VRBO property.

Wayne Brooks · Answer

You can “expense” holding costs....property taxes, Mtg interest, insurance, utilities, etc.

you have “add these costs to your basis for depreciation”for repairs and improvements.

You may be able to depreciate furniture/appliances on a shorter schedule.

Benjamin Enriquez · Answer

Following... my wife and I had a similar conversation last night. We bought furniture a few months before we listed and was told we could not claim until rental went live.

Sharon H. · Answer

Assuming you are not a real estate professional, your rental activity is a passive activity. That means your passive loss can only be offset with other passive income. If you don't have any other passive income incurred in 2018, your passive loss from your Airbnb rental will be carried forward from 2018 to 2019 which can be deducted in 2019 if you have enough passive income in 2019 to offset any 2018 passive loss.

Paul Sandhu · Answer

@Cheryl Vargas for me, a sofa is $25. Bedroom suite is about $100. End tables and night stands are $5. Dining tables and chairs are $50. Recliners are $10. Fridges are $100. Washer/dryer set is about $150. I don't see why the IRS would want these capitalized instead of expensed. I expense everything I can.

I can't get any sort of bargain on HDTVs, let alone a SMART TV. I have to pay full retail.

Nicholas Aiola · Answer

@Patrick McCabe Yes, sir! Looking forward to speaking.

Can I deduct expenses incurred prior to listing my STR?

Can I deduct expenses incurred prior to listing my STR?

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