Rental and Schedule E


J

jjkooner

Hello,

I moved out of my house in Dec 2007. My house was empty for the
entire year in 2008. During this time it was listed for sale in the
MLS and I was also advertising for a renter. A finally got a renter
that moved in Jan 1 2009 so I had no rental income in 2008.
Questions:

1. I had the outside of the house painted for 1K in 2008, can I claim
this as a repair on Schedule E even though the house was listed for
sale?

2. Can I claim the mortgage interest on Schedule A or should I claim
it on Schedule E?

3. I read something about depreciating property over 27.5 years, would
this apply to my house now that it is a rental?

4. Does depreciation apply to upgrades like a new kitchen and/or does
it apply to the property value itself? How is this calculated? It this
related to the housing market? I bought the house in June 2006 for
274K

Any help appreciated,
Kooner.
 
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M

Mark Bole

Hello,

I moved out of my house in Dec 2007. My house was empty for the
entire year in 2008. During this time it was listed for sale in the
MLS and I was also advertising for a renter. A finally got a renter
that moved in Jan 1 2009 so I had no rental income in 2008.
Questions:
Facts and circumstances -- to what do you attribute a year-long wait to
find a renter? Were similar rental properties also typically vacant for
a year or more in your area? Did you reject any applicants? Did you
consider Section 8 tenants?

Also, in some places, such as California, renters must be given adequate
notice (30-60 days) before you can kick them out to sell a property.
Was the property truly available for rent, knowing that you might
receive a purchase offer at the same time you were reviewing tenant
applications?

I am surprised that a real estate agent would leave a property on the
MLS for a year.

Obviously, lots of folks would like to "have their cake and eat it too"
regarding deduction of personal expenses while vacant property is up for
sale, so you should have good records to show your status as a landlord
before you deduct rental expenses against no rental income.
1. I had the outside of the house painted for 1K in 2008, can I claim
this as a repair on Schedule E even though the house was listed for
sale?
If it was truly available for rent, yes.
3. I read something about depreciating property over 27.5 years, would
this apply to my house now that it is a rental?
Residential rental real estate is 27.5 years straight line depreciation
from date placed in service as a rental.

4. Does depreciation apply to upgrades like a new kitchen and/or does
it apply to the property value itself? How is this calculated? It this
related to the housing market? I bought the house in June 2006 for
274K
Depreciation applies to the building including additions or
improvements, but not the land. Appliances and furniture, if any, are
also depreciable under MACRS. Your depreciable basis in the building is
the lower of fair market value (FMV) or cost at the time it was placed
into service, so if the market value had declined, you need to take that
into account. If you did a kitchen remodel after you moved out, that
would argue in favor of the property not being available for rent during
the period of the remodel.

Of course, the depreciation allowed or allowable will probably come back
in the form of taxable gain which cannot be excluded under Section 121
and which does not get the most favorable capital gain treatment when
you sell the property. This is the section that says if you owned and
lived in the house for at least two years, you have up to three years
after you move out to sell it and exclude up to $250K ($500K MFJ) in gain.

See IRS Pub 527 for more details on rental property.

-Mark Bole
 
P

Paul Thomas, CPA

I moved out of my house in Dec 2007. My house was empty for the
entire year in 2008. During this time it was listed for sale in the
MLS and I was also advertising for a renter. A finally got a renter
that moved in Jan 1 2009 so I had no rental income in 2008.
Questions:

1. I had the outside of the house painted for 1K in 2008, can I claim
this as a repair on Schedule E even though the house was listed for
sale?

2. Can I claim the mortgage interest on Schedule A or should I claim
it on Schedule E?

3. I read something about depreciating property over 27.5 years, would
this apply to my house now that it is a rental?

4. Does depreciation apply to upgrades like a new kitchen and/or does
it apply to the property value itself? How is this calculated? It this
related to the housing market? I bought the house in June 2006 for
274K




Since you had it up "for sale / for rent" during the year, at what point in
time did you know you had the renter in place and you were headed that
direction over selling it? That's your rental start date, most likely late
in 08. That's also probably about the time you told the realtor to pick up
their signs. Everything rental related starts on that date, the date you
took it out of "for sale" status and started using it for rental purposes.

Painting would be a fixing-up expense, and the fixtures would be
improvements that would have added to basis on a sale, and I would take it
as a basis increase to be depreciated as rental.
 
J

jjkooner

Facts and circumstances -- to what do you attribute a year-long wait to
find a renter?  Were similar rental properties also typically vacant for
a year or more in your area?  Did you reject any applicants?  Did you
consider Section 8 tenants?
Ok, I see your point. Here's the time line:

Jan 1 2008, my house was listed on for sale on ForSaleByOwner.com and
on the MLS. It was not listed for rent but I would offer it for rent
to people that called to inquire.
July 1 2008, I signed up with a full service realtor (Baird and
Warner). The house was listed for sale on the MLS. I told my realtor
that I would rent it to someone with a good credit history. The Baird
and Warner contract I signed stated that if the property was rented, I
would have to pay a finder's fee (one months rent).
Oct 15 2008, tenant visits my house during an open house, tenant
undecided at this point.
Dec 1 2008, house is entered into the MLS as a rental to get more
exposure (tenant still unsure).
Dec 10 2008 tenant signs paperwork to rent.
Jan 1 2009, tenant moves in.

How about using July 1 2008 at the date when the "property was placed
in service"? That was the point I was really pushing for a renter
while the property was listed for sale. I had rejected a few
applicants but I don't have any records to prove.
Also, in some places, such as California, renters must be given adequate
notice (30-60 days) before you can kick them out to sell a property.
Was the property truly available for rent, knowing that you might
receive a purchase offer at the same time you were reviewing tenant
applications?

I am surprised that a real estate agent would leave a property on the
MLS for a year.

Obviously, lots of folks would like to "have their cake and eat it too"
regarding deduction of personal expenses while vacant property is up for
sale, so you should have good records to show your status as a landlord
before you deduct rental expenses against no rental income.


If it was truly available for rent, yes.
If the property was placed in service on July 1, then I can claim 1K x
6/12 = 500, right?
Residential rental real estate is 27.5 years straight line depreciation
from date placed in service as a rental.


Depreciation applies to the building including additions or
improvements, but not the land.  Appliances and furniture, if any, are
also depreciable under MACRS.  Your depreciable basis in the building is
the lower of fair market value (FMV) or cost at the time it was placed
into service, so if the market value had declined, you need to take that
into account.  If you did a kitchen remodel after you moved out, that
would argue in favor of the property not being available for rent during
the period of the remodel.

Of course, the depreciation allowed or allowable will probably come back
in the form of taxable gain which cannot be excluded under Section 121
and which does not get the most favorable capital gain treatment when
you sell the property.  This is the section that says if you owned and
lived in the house for at least two years, you have up to three years
after you move out to sell it and exclude up to $250K ($500K MFJ) in gain.
I only lived in my house for 1.5 years, then moved out of state for a
better job. I looked at sec 121 briefly, I didn't see anything about
prorating my 1.5 years. So, if I sell my house in 10 years, I'd have
to pay taxes on the entire gain plus the depreciation I've claimed?
Unless I moved back in to meet the 2 out of 5 years rule?
See IRS Pub 527 for more details on rental property.
I read Pub 527, that was a big help. I just need to figure out the FMV
of my property. Assuming it was placed into service on July 1 2008,
when my realtor has assessed my property at 265K. How does that break
down into land and building? Looking at the numbers on my latest
property tax bill, the building is assessed at 84% and the land at
16%, can I used these numbers?. That is, 265K x 84% = 222.6K at the
FMV?
Kooner.
 
M

Mark Bole

Ok, I see your point. Here's the time line:

Jan 1 2008, my house was listed on for sale on ForSaleByOwner.com and
on the MLS. It was not listed for rent but I would offer it for rent
to people that called to inquire.
July 1 2008, I signed up with a full service realtor (Baird and
Warner). The house was listed for sale on the MLS. I told my realtor
that I would rent it to someone with a good credit history. The Baird
and Warner contract I signed stated that if the property was rented, I
would have to pay a finder's fee (one months rent).
Oct 15 2008, tenant visits my house during an open house, tenant
undecided at this point.
Dec 1 2008, house is entered into the MLS as a rental to get more
exposure (tenant still unsure).
Your documentation in my view supports Dec. 1st as the rental in-service
date.


If the property was placed in service on July 1, then I can claim 1K x
6/12 = 500, right?
No. Painting paid for after rental in-service date would normally be a
fully-deductible repair. The best you could hope for if paid prior to
Dec 1st is to add the cost to your basis. In no case would you pro-rate
it across a fraction of the year, however. (I'm assuming the paint job
didn't take more than a day or two).


I only lived in my house for 1.5 years, then moved out of state for a
better job. I looked at sec 121 briefly, I didn't see anything about
prorating my 1.5 years. So, if I sell my house in 10 years, I'd have
to pay taxes on the entire gain plus the depreciation I've claimed?
Unless I moved back in to meet the 2 out of 5 years rule?
That no longer applies. If you move back in for the last two years, you
would have to pro-rate your exclusion by the number of years of
non-qualified use vs total years you owned the property. (This is a new
law passed in the last year or two, there are more details of course).

I read Pub 527, that was a big help. I just need to figure out the FMV
of my property. Assuming it was placed into service on July 1 2008,
when my realtor has assessed my property at 265K. How does that break
down into land and building? Looking at the numbers on my latest
property tax bill, the building is assessed at 84% and the land at
16%, can I used these numbers?.
Yes, as a safe harbor you can use local assessor values for land vs.
improvements.

-Mark Bole
 
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J

jjkooner

Your documentation in my view supports Dec. 1st as the rental in-service
date.


No.  Painting paid for after rental in-service date would normally be a
fully-deductible repair.  The best you could hope for if paid prior to
Dec 1st is to add the cost to your basis.  In no case would you pro-rate
it across a fraction of the year, however.  (I'm assuming the paint job
didn't take more than a day or two).
In Pub 527 (2008) Chapter 4, pg16 at the bottom under "Proper Changed
to Rental Use" the second paragraph states "You can deduct as rental
expenses only the part of the expense that is for the part of the year
the property was used or held for rental purposes"
Then there is an example where someone starts renting June 1 and can
claim 7/12 of the yearly expenses. That's why I thought my painting
would be pro-rated because it is an expense too?
Kooner.
 
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