rental expenses questionable

[Possi]

I am trying to give my client the benefit of the doubt here...

She is civil service and moves from place to place, This 2009 job is expected to last exactly one year, but she has the option to extend her stay in Korea for 2 more years. I have taken moving expenses for the last 2 yrs and she has more this year. That's another subject, though.

Before she took this position, she purchased a home and lived in it, fixing it up from Jan-June 2009. In July, she left for Korea and began renting it.

She has turned in a slew of receipts from Jan-June regarding the house. I had to go through receipts and called her on a couple of things like dishwasher and frige where one had clearly been returned, another for a TV.

She expects to expense all these receipts, from .54 to $583,00 all to repairs on the rental property.

It was clearly her home until June. In the past, I have added this to the basis and depreciated all repairs prior to availability to rent, depreciating as basis 27.5 yrs.

These receipts total aroind 3-4k including labor for repairs. The flooring is $6700.

Please validate me or correct me in believing this must be 27.5, added to basis... I'd love to expense it all, so if I'm wrong, let me know! =)

thanks!
~possi

[BHoffman]

Hi Possi - you are right and you might show Pub 527 to your client, especially the part about permanent improvements. A built-in dishwasher would be an adjustment to basis. Stand-alone furniture and appliances - if she is renting fully furnished - might be depreciated separately with FMV at the conversion date as basis and whatever their class lives would be but I'm not sure about that. You might want to discuss depreciation recapture rules with her and perhaps suggest straight line with the furniture and appliances if that's the route taken.

Pub 527 says in part:

"Basis of Property Changed to Rental Use
When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion.

Fair market value. This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property.

Figuring the basis. The basis for depreciation is the lesser of:
The fair market value of the property on the date you changed it to rental use, or

Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. For other increases and decreases to basis, see Adjusted Basis in chapter 1."

Hope this helps.

[snowshine]

Any expense for a period the unit is not available for rent is depreciated. In this case, adding to basis is appropriate as it was not previously rented. I have had the dubious pleasure to represent 3 of these in person at our local IRS office this year (1 was your situation, the other 2 were rentals that were out of service for a lenghty period of repairs) and can promise that you do not want that experience.

[Possi]

Oh no! 3 IRS visits?

I'd hate to be you!

Thanks for all the help, and the validation...

[AJsTax]

You are allowed to allocate the assets to different classes, thus the appliances and furniture and carpets can go on depreciation schedule @ 5 years. All the repairs to the building are added to the basis of the structure and depreciated for 27.5 yrs.

[Possi]

Many are small...

So many of these are small things like closet organizers, nuts and bolts, and it looks like some decorations...
I'll put the frige on 5 yr and the flooring on 27.5.
All these little things are what drive me nuts. I hate that they have to go on 27.5, but rules are rules.

[erchess]

Materiality

I thought that a small expenditure say up to a hundred bucks could always be expensed.

[AJsTax]

I thought that a small expenditure say up to a hundred bucks could always be expensed.

The question here is a timing issue. The home was not available for rent yet, so the items are not allowed against rental income as a direct expense. They get added to the basis. Small items after starting to rent, then yes, expense them. And the dollar amount in not set in writing, just must be small enough to not materially affect the taxable income.

[Snaggletoof]

Expense Items

I probably lean a little to the liberal side in expensing, compared to others who have posted, but basically an improvement is a capital item. If it is a replacement, it is a repair and may be expensed.

It is not unusual to spend $2000-$3000 in repairs behind a slovenly tenant. I generally ask to see a list of expenditures, and if a couple of large items stick out, I make sure they can be expensed instead of capitalized.

I would also capitalize appliances as depreciable equipment over 5 years, even if they are replacement items. Equipment which lasts several years should be expensed if under $100 or thereabouts. "Thereabouts" is a subjective term, and could go as high as $500 if there are multiple rentals.

[taxea]

Look at it this way...you buy a house and do improvements to your liking (to personalize the house). Then you decide to move to another city and to rent the house out. All the improvements you have made get added to your basis. You depreciate the basis on the rental.
As for furnishings, appliances etc, the depreciation amount, if you choose to depreciate separate from the basis, would have to be allocated between the date of purchase and the date in service of the rental. You would have to calculate the cost of the item diviided by the months of depreciable life, and then subtract the personal use months from the basis of the item.
Personally I would lump it all into the improvements rather than depreciating it separately because it was already in the house when it became a rental. This would be like selling a house with these items included. They are not sold separately unless the seller agrees to sell them to the buyer for an additional price which is not the case with this rental.

[BHoffman]

As for furnishings, appliances etc, the depreciation amount, if you choose to depreciate separate from the basis, would have to be allocated between the date of purchase and the date in service of the rental. You would have to calculate the cost of the item diviided by the months of depreciable life, and then subtract the personal use months from the basis of the item.

The bases of the furnishings and appliances are not calculated in this manner. The basis will be the FMV or the purchase price, whichever is lower, on the conversion date. So, if the client purchased a refrigerator for $800 on Jan 1 for personal use as she lived in the home until May 31, and then converted to a rental on June 1 - she would need to be able to determine the fair market value of the refrigerator on June 1. That is the depreciable basis of the refrigerator and the depreciation would begin on June 1.

[S T]

Conversion To Rental

I tend to agree with B Hoffman posts on the conversion date and when to start to apply as a rental. , this is on a case by case (t/p by t/p basis) you do have to look at all of the facts and circumstances of each tax client, intent, the dates, the repairs, the capital improvements, viable rental income, etc.

Possi, we all know you know the regulations, so you will just have to obtain more info from your client and then move forward to apply those regulations, and assign to cost basis, set up on depreciation, etc.

I do believe that most of us have been in your position, and we are offering the general guidelines to assist you.

If in fact a converted rental, and appliances placed in service and rental income received directly behind those expenses, I would have no issue with adding to depreciation for 5 years, same with carpet. Painting would be an expense, minor repairs would be an expense, etc.

I think the issue on personal converted to rental is the timing. So can't upgrade all on the personal residence 3 months prior, then all of a sudden turn into a rental 3 months later, and obtain a tenant 6 months later. And t/p expect to benefit from the expenses. In which case due to timing I would just add to basis, but if timing appropriate, place in service the required depreciation, and also the expenses.

I am over simplifying, but hope it assists.

Sandy

[taxea]

BH...if the way I am figuring the basis on the furnishings and appliances is not correct would you please tell me how to do it correctly

[Possi]

timing

I tend to agree with B Hoffman posts on the conversion date and when to start to apply as a rental. , this is on a case by case (t/p by t/p basis) you do have to look at all of the facts and circumstances of each tax client, intent, the dates, the repairs, the capital improvements, viable rental income, etc.

Possi, we all know you know the regulations, so you will just have to obtain more info from your client and then move forward to apply those regulations, and assign to cost basis, set up on depreciation, etc.

I do believe that most of us have been in your position, and we are offering the general guidelines to assist you.

If in fact a converted rental, and appliances placed in service and rental income received directly behind those expenses, I would have no issue with adding to depreciation for 5 years, same with carpet. Painting would be an expense, minor repairs would be an expense, etc.

I think the issue on personal converted to rental is the timing. So can't upgrade all on the personal residence 3 months prior, then all of a sudden turn into a rental 3 months later, and obtain a tenant 6 months later. And t/p expect to benefit from the expenses. In which case due to timing I would just add to basis, but if timing appropriate, place in service the required depreciation, and also the expenses.

I am over simplifying, but hope it assists.

Sandy

Yes, the timing is certainly the issue. I don't want to come off like an evil auditor, but she gave me little reciepts that add up to a lot, from places like Ross' clothing which is decorative items, mostly purchased in JANUARY AND FEBRUARY! That was when she bought it new, and I FEEL confident that she did not intend to rent her house out when she bought it. It would be accusatory of me to approach her in that way, so I'm trying to quietly take as much as I legally can up front and depreciate the rest.

I hear loud and clear that these items purchased need to be added to the basis, save the appliances that I will depreciate for 5 years.

I, like Snag, am inclined to expense more aggressively than some, but I clearly have receipts dating back to the purchase, and they are not being expensed.

Thanks, "Office!"