Rental Start up Expenses

[GTS1101]

I have a new client who inherited a rental property February 2012. She spent two years rehabbing the property doing a combination of repairs, capital improvements, had hauling expenses, utilities, and education expenses about rentals. In July 2014 it became available for rent. So from February 2012 to July 2014 what do I do with the repair expenses. For example she paid someone in 2013 to fix the A/C cost was $200. She paid someone $300 to haul away garbage at the rental. She paid someone $600 to replace the bathtub. Do these costs get added to the inherited value to determine the amount to depreciate in 2014 or are they fully deductible as rental expenses in 2014 or are they considered start up expenses and up to 5,000 is deductible and the rest amortized over 15 years. It is very confusing and I have had very few start up rentals. Most of my clients already had established rentals and don't take one to two years to get it ready to rent. I have seen lots of conflicting information about this topic in my research.

GTS1101

[taxea]

If it wasn't available for rent during the time the owner had this work done they would not be rental expenses. Client should have done tax consequences research before doing the repairs and upgrades.
Was this a rental at the time the TP acquired it in 2012? Was the TP paying property tax or any other related expenses between 2012 and 2014?
It may be possible to add these expenses to the TP's basis, you will need to do some research.

[kathyc2]

I have a new client who inherited a rental property February 2012. She spent two years rehabbing the property doing a combination of repairs, capital improvements, had hauling expenses, utilities, and education expenses about rentals. In July 2014 it became available for rent. So from February 2012 to July 2014 what do I do with the repair expenses. For example she paid someone in 2013 to fix the A/C cost was $200. She paid someone $300 to haul away garbage at the rental. She paid someone $600 to replace the bathtub. Do these costs get added to the inherited value to determine the amount to depreciate in 2014 or are they fully deductible as rental expenses in 2014 or are they considered start up expenses and up to 5,000 is deductible and the rest amortized over 15 years. It is very confusing and I have had very few start up rentals. Most of my clients already had established rentals and don't take one to two years to get it ready to rent. I have seen lots of conflicting information about this topic in my research.

GTS1101

I think this comes back to the age old question of is owning a rental property an investment or a business?

The safest way would be as an investment and capitalize the pre-rent expenses and depreciate over 27.5 years.

[Burke]

That is what I would do. Info in the OP indicates it was not rented during this time of rehab, but was not specifically stated. If it were, the repairs would have been deducted as rental expenses on the Sche E. Major improvements capitalized. If it was not rented, all added to basis for depreciation.

[Roland Slugg]

I disagree with all of the above replies. Except for the items that are deductible as itemized deductions under §163 (interest) and §164 (taxes), or capitalized and depreciable when placed in service, such as appliances, carpeting, etc., the expenses referred to in the O.P. are all start-up expenses and as such are amortizable over 180 months. (Code §195) The T/P may also make an election to deduct up to $5,000 (or a lessor amount if the $50,000 limiting maximum applies).

The term "start-up expenditure" means any amount paid or incurred in connection with ... any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business. (Emphasis added)

The above quote is taken directly from Code §195(c)(1)(A)(iii). The key wording here is the portion bolded, which clearly includes rental property. Although rental property is usually not regarded as a trade or business for many purposes ... such as the OIH deduction ... it is nevertheless often included under the phrase "trade or business" when applying the meaning of other parts of the Code. This is one of those times.

If you do a Google or other search for a phrase such as "start-up expenses for rental property," you will probably get several excellent and authoritative hits.

[taxea]

That is what I would do. Info in the OP indicates it was not rented during this time of rehab, but was not specifically stated. If it were, the repairs would have been deducted as rental expenses on the Sche E. Major improvements capitalized. If it was not rented, all added to basis for depreciation.

OP " In July 2014 it became available for rent."

If the intent all along was to rent it then I agree with Roland's post.

[TAXNJ]

Correct

OP " In July 2014 it became available for rent."

If the intent all along was to rent it then I agree with Roland's post.

Similar post originally posted 7-31-15 and last reply 8-1-15 and many good post replies addressing same issue as in this new post.

[GTS1101]

Thank You!

Thank You! I appreciate all the insight. It is really helpful with my current client and any future clients with this issue. Yes the intent was to rent the property from the very beginning. The home was damaged very badly and it a long time to get it ready to be able to have someone move into the home.

[kathyc2]

I disagree with all of the above replies. Except for the items that are deductible as itemized deductions under §163 (interest) and §164 (taxes), or capitalized and depreciable when placed in service, such as appliances, carpeting, etc., the expenses referred to in the O.P. are all start-up expenses and as such are amortizable over 180 months. (Code §195) The T/P may also make an election to deduct up to $5,000 (or a lessor amount if the $50,000 limiting maximum applies).

The above quote is taken directly from Code §195(c)(1)(A)(iii). The key wording here is the portion bolded, which clearly includes rental property. Although rental property is usually not regarded as a trade or business for many purposes ... such as the OIH deduction ... it is nevertheless often included under the phrase "trade or business" when applying the meaning of other parts of the Code. This is one of those times.

If you do a Google or other search for a phrase such as "start-up expenses for rental property," you will probably get several excellent and authoritative hits.

When you take the bolded words in isolation, I can see your point. However, IMO, when taken with the entire sentence and entire code section, I don't think the intent of 195 is to include investment property. You can find opinions via google that go both ways for it, and that makes it a grey area.

As in all grey areas, it is up to the preparer and client if they choose to go the more aggressive or safe route.

[Roberts]

When you do repairs to a building without it being available for a rent - you are a rehabber.
When you do repairs to a rental property - you are a landlord doing maintenance and repairs.

Different tax situations.

Had a client who bought a building, did about $25k of work to it before he could get an occupancy permit and expected to take a loss and use that loss (tax refund) to buy a second property. When I informed him of the reality he threw a fit.

[Burke]

I stand by my answer. Her question was "what do I do with the expenses from 2012 to July 2014" when it became available to rent. I say capitalize and depreciate starting in 2014. The cite referred to in Roland's response specifically says (in the unbolded part) that it refers to a trade or business. Rental property has repeatedly been classified as not a trade or business, but passive income.

[TaxGuyBill]

She spent two years rehabbing the property

How do you classify this as repairs? That sounds like one big capital improvement that you would need to add it to the basis and depreciate. Capital improvements are not eligible as Start-up Expenses: §195(c)(1)(B).

[Bees Knees]

I disagree with all of the above replies. Except for the items that are deductible as itemized deductions under §163 (interest) and §164 (taxes), or capitalized and depreciable when placed in service, such as appliances, carpeting, etc.,...

Key to Roland's post has to do with capital vs. deductible expenses. Start-up cost rules under IRC §195 only apply to those type of expenses that would be currently deductible if incurred by an active business. Most of those costs (other than utilities and education) listed by the original poster are referring to capital improvements, which are subject to depreciation, as Burke pointed out.

If it took 2 years to rehab the home before it was ready for rental, those are major improvements, not repairs. Don't kid yourself. An IRS auditor is most definitely going to say those are capital improvements subject to depreciation.

[Roberts]

The above quote is taken directly from Code §195(c)(1)(A)(iii). The key wording here is the portion bolded, which clearly includes rental property. Although rental property is usually not regarded as a trade or business for many purposes ... such as the OIH deduction ... it is nevertheless often included under the phrase "trade or business" when applying the meaning of other parts of the Code. This is one of those times.

I disagree. Capital Improvements that increase the value of the property are NOT start-up expenses.

When you are a rehabber you have one set of rules.
When you are a landlord you have another set.