Rental Property Renovation Depreciation

Forum|Forum|2 years ago
January 7, 2024
2 replies
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In 2021 I did a major renovation to my rental property (complete remodel of kitchen and bathrooms, appliances, flooring). At the time I selected "Appliances, Carpet and Furnishings" as the most logical selection under Rental Real Estate Property from the list of asset types provided. I now see that it has set up my depreciation method as 200DB/MQ (which is 5 year double declining balance). Is this acceptable or do I need to amend my 2021 and 2022 returns? I see now through recent Q&A responses that I should have selected "Residential Rental Real Estate" (though this still looks more like adding a new rental property, than it does capital improvements on an existing property).

Best answer by Critter-3

That is the correct place for the appliances which can be entered individually and depreciated over 5 years. The rest of the improvement is depreciated like the rest of the property over 27.5 years... follow the residential property path to enter that lump sum figure.

Critter-3Answer

Raeka

I started restoring one of our old apts. when tenant moved out in June 2023. Its still not finished. I expect to finish this year. There will be more expenses but I paid the largest part already which was over $25K. That all happened in 2024. Do I now add the apt. restoration to the depreciation tables? It asks when it was put in service and I don't yet have a completion date or date a new tenant will be able to move in. OR

Should I add this job as an asset list where I already have another similar situation called "Construction in progress" which I named hall project (still not done yet) and then move them each to depreciation schedule once the work is done and completed?

How do I handle that for 2024? Thanks

DianeW777

It depends. If your property is available for rent even while renovations are taking place then you add it to the depreciation tables as a new asset if it is considered as structural components (see definition below). This would be added as an asset called 'Improvements-2024' in your rental property. As you noted, if you are not completely finished with renovations then you would not add any improvements until completed and the property is open and available for rent. Instead you would add that improvement when it is completed in 2025.

IRS definition of Structural components (for your review):

Parts that together form an entire structure, such as a building. The term includes those parts of a building such as walls, partitions, floors, and ceilings, as well as any permanent coverings such as paneling or tiling, windows and doors, and all components of a central air conditioning or heating system including motors, compressors, pipes, and ducts. It also includes plumbing fixtures such as sinks, bathtubs, electrical wiring and lighting fixtures, and other parts that form the structure.

Vacant rental property. If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you can’t deduct any loss of rental income for the period the property is vacant.
- IRS Publication 527, page 6
  - Watch the questions in TurboTax to make sure a loss is not allowed if this fits your situation.
  - Example: Did you rent this property at fair rental value all of 2024?

@Raeka

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Mike9241

See this link for the guidance the iRS provided on repairs vs improvements. Those components that increase the value of the property must be capitalized. the permanent components like new floors, windows, tubs showers sinks would be 27.5 years. appliance and carpeting are 5 years. Obviously some old components were replaced if these were separate assets any undeprecited balance can be written off.

https://www.dbbllc.com/newsletters/focus-our-tax-e-newsletter/irs-clarifies-capital-improvement-vs-repair-expense

TC78

We did renovations to a condo before putting it into service in February 2024. When I go to enter the value (after specifying "Appliances, carpet, furniture") it asks for a date of purchase. There were about 40 trips to the hardware store over several months. Do I need to enter every $8 purchase, or can we just list the asset as "Renovation" and use the date we put it in service? The total value is only about $3000.

PaulaM

Employee

Was the property ever in service in 2023? If not, than the renovations made would be added to the property's basis and depreciated going forth in 2/2024. There is nothing to list for 2023.

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