Tax deductions before renter moves in?

Question

We are about to move out of our home and rent it out.  If we want to fix it up (replace stove, microwave, A/C unit), are these expenses tax deductible while we are living here?  Our first tenants move in next month.  In other words, should we replace these things after the renters move in for it to be tax deductible?

Brandon Hall · Answer

@Rob Beland No set threshold. Just remember, if you are audited, you bear the burden of proof. You need to keep receipts for business expenses over $75. Here is so info on documents you should retain: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/What-kind-of-records-should-I-keep

Brandon Hall · Answer

@John Vollmer Excellent question. Generally, expenses related to a rental property that are incurred prior to it being placed into service are capitalized and depreciated. After a property is placed into service, your options open as to how you treat expenses.

Usually, "placed in service" means the day that the property is substantially ready to rent. This is usually the date that the property is advertised for rent. However, since you are still living in the property, I'd be nervous that these expenses will be seen as some sort of personal gain, rather than an expense for your rental business, so just to be safe, I'd defer all expenses until the tenant has moved in.

The cost to replace the stove and microwave may be deductible in the current year, however replacing an A/C unit is usually capitalized and depreciated, unless you own a building that has many A/C units attached to it (like an apartment building).

Something important for you to understand is the Section 121 exclusion which allows you to exclude $250k ($500k if married filing joint) of capital gains on a primary residence as long as you have lived there for two of the previous five years. So, from the day you move out, you have three years to sell the property and shelter capital gains resulting from that property.

Rob Beland · Answer

Good question @John Vollmer. Maybe @Brandon Hallcan chime in. I think you're fine deducting the expenses as long as you are honestly moving out and renting the place out. What are the real chances you would be audited anyways and can you defend your actions? Im not sure of the law and Im not a CPA or tax attorney but Brandon would know. Personally I say go for it...

Rob Beland · Answer

@Brandon Hallon a similar note, in your experience, if somebody was audited is there an acceptable level of missing receipts for expenses? In other words if I was audited and I could only produce receipts for 80% of the expenses I claimed is that ok or is 90% ok or is it 100% or nothing?

Patrick Donovan · Answer

You should ask your tax guy to know for sure. All I know is that I keep all of my expenses on a ledger and come tax time let my guy decide what is deductible and what isn't.

Tax deductions before renter moves in?

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