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I've gotten mixed answers on this. I'm living in the house currently and need to have new flooring put in (the carpet is very stained & ripped in some places), need some cabinets repaired, some new paint, etc. These things will add up to a significant chunk of change, but unfortunately I have a chronic pain condition that makes it difficult for me get these things done quickly and consecutively. I'm wondering whether they can be deducted as expenses even if they are spread out over a few months. Does anyone know?
At the conversion date, fix up expenses csn be depreciated over 27.5 years, using in service date. Lower of cost + improvements or fair market value of the house.
It's a complicated question which is why you are getting conflicting answers. You can deduct some of those items, like the flooring, based on their use as a rental. Say you install new carpet on Jan 1st at a cost of $10k, for simplicity, and turn it into a rental on July 1st. The annual tax deduction on that is $2k, it is 5-year property to the IRS, so you would be able to deduct the depreciated value of $1k in the first year. It is best to move out and then make repairs when converting a primary residence into a rental because all expenses to prep a property are deductable, including repairs.
Repairs made while it is a primary residence will almost always not be deductable. On your taxes repairs are one time expenses fully deducted the year they are made. Replacements are depreciated deductions spread out over the life of the item. There is a deduction method that allows you to deduct a large portion (80% I think) of depreciated items in the first year.
It's not easy to give you an answer, talk to a tax professional.
It's a complicated question which is why you are getting conflicting answers. You can deduct some of those items, like the flooring, based on their use as a rental. Say you install new carpet on Jan 1st at a cost of $10k, for simplicity, and turn it into a rental on July 1st. The annual tax deduction on that is $2k, it is 5-year property to the IRS, so you would be able to deduct the depreciated value of $1k in the first year. It is best to move out and then make repairs when converting a primary residence into a rental because all expenses to prep a property are deductable, including repairs.
Repairs made while it is a primary residence will almost always not be deductable. On your taxes repairs are one time expenses fully deducted the year they are made. Replacements are depreciated deductions spread out over the life of the item. There is a deduction method that allows you to deduct a large portion (80% I think) of depreciated items in the first year.
It's not easy to give you an answer, talk to a tax professional.
Thank you. I did ask both my old and new CPA and got conflicting answers. One said to move out entirely and the other said that I have them done prior to moving in preparation of setting the house up as a rental, that I could deduct them as start-up expenses.
After moving out I'd anyway be renting for a while; how do I prove that the property is no longer my primary residence? I'll likely be staying in temporary accommodations for a while and then finding a rental to live in myself.
I can't give you a good answer but one way schools go by is utilities. You can have a month to month agreement signed by you and your new landlord, set termination rules very short to avoid arguments. You can also change your address with the post office and DMV. I doubt if audited it would even come up if you aren't trying to claim way more than the average person would.
I am NOT a tax expert, but I had exactly this situation. You need to look at IRS Pub 527, which says in part:
"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 2."
Note that you have a distinction between "deductions" and "adjustments to basis." A deduction will be subtracted from your tax bill until its value decreases to zero. An adjustment to basis is factored in at the time you sell the property. You definitely need help from a tax professional experienced in real estate matters when you try to sell your rental property. There are some things you may consider "improvements" that the IRS doesn't.
I am still dealing with tax problems over the sale of one of my rentals I had previously occupied. It is no fun and I am determined to get out of the landlord business as soon as possible.
Usually you can't deduct if you live there and it's still your primary. I had the same situation as you did when I moved and turned my old home into a rental. As soon as I closed on the new house it became my primary. I moved out and immediately started renovating the old house. I did start purchasing items before the move out, but it was all after the close on the new house.
I would also start a separate account for the rental and don't mix finances from personal to rental account. Run it as its own financial accounting.
I can't give you a good answer but one way schools go by is utilities. You can have a month to month agreement signed by you and your new landlord, set termination rules very short to avoid arguments. You can also change your address with the post office and DMV. I doubt if audited it would even come up if you aren't trying to claim way more than the average person would.
Thanks; I really appreciate it. My plan was to stay at a hotel or Air B&B in AZ while I look for a house to rent, and I didn't want to change my address until I was sure I moved out of CA. So I may not even have AZ utility bills for some weeks or months. Unfortunately my pain condition causes me to move much more slowly than the average person. It would be tricky for me to first find a place to rent and then do all the renovations as I wanted to oversee them, but I could try it.
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