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March 10, 2023
Question

Cost-Basis on Rental Property (items before in-service)

  • March 10, 2023
  • 3 replies
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I inherited a property that I have turned into a rental. Is the Cost-basis the fair market value minus the land value?

 

I know that any improvements I did before it went into service can be added to the value of cost-basis.

 

Can other items such as a dumpster rental and utilities before the house went into service able to be added to the cost-basis or are those not deductible at all?

3 replies

Carl11_2
Employee
March 10, 2023

The cost basis is whatever the FMV was on the date the person you inherited it from, passed. Doesn't matter how long ago they passed. That's your cost basis.

Can other items such as a dumpster rental and utilities before the house went into service able to be added to the cost-basis or are those not deductible at all?

With the exception of property improvements, costs incurred before the property was placed in service and available for rent, are not deductible. However, if you paid for property improvements, I would expect things like dumpster rental to be "a part of" the improvement process. For example, if you had a new roof put on, the old roof had to be torn off first of course, and go into a dumpster to be hauled away. In such a case, the dumpster rental along with any disposal costs incurred would be a part of the cost of the new roof.

In case you find it helpful, the below information is provided for your convenience.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2nd home before, then this date is the day AFTER you moved out, or the date you decided to lease the property – whichever is later.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter was contracted to move in, and/or "could" have moved in. That would be your "in service" date or after if you were asked for that. Vacant periods between renters do not count for actual days rented. Please see IRS Publication927 page 17 at https://www.irs.gov/pub/irs-pdf/p527.pdf#en_US_2020_publink1000219175 Read the “Example” in the third column.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days *YOU* lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence, 2nd home, or any other personal use reasons after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.

Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.

 

Expenses for these types of costs are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria need to be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must retain or add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

There are rules that allow you to just flat-out expense and deduct some property improvements instead of capitalizing and depreciating them, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and its assets in the usable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent for the very first time are not deductible.

Repair

Those expenses incurred to return the property or its assets to the same usable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent for the very first time are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a 2-bedroom house into a 3-bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

 

PatriciaV
Employee
March 15, 2023

1. Yes, the cost basis for the rental property would be the FMV on the date of death, exclusive of the land value.

 

2. Yes, improvements made before the property went into service are separate rental assets for depreciation. Be sure you use the date you offered the property for rent as the date the improvements were placed in service (start date).

 

3. Yes, any expenses you incurred before you listed the property increase the basis of the property and should be entered as separate Rental Assets, subject to depreciation. Use the same start date for all rental assets.

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March 15, 2023

Thank you all for your responses.

 

I think there conflicting answers to if expenses before the in-service date that do are not improvements can be added to the cost-basis.   An example is the electric bills for the 6 months before the property went in-service.  I'm still not clear if that can be added to the cost-basis.

 

 

March 10, 2023

Yes, improvements can be added to the Cost Basis; however, expenses like utilities, etc. can't be deducted as Expenses prior to 'date placed in service' and are not added to Cost Basis. 

 

If the property was given to you or if you inherited it, or if you traded another property for the current property, there are special rules for determining your tax basis in your rental property.

 

  • If you were given the property, for example, your basis is generally the same as the basis of the generous soul who gave it to you.
  • If you inherited the property, your basis is generally the property's value on the day the previous owner died. (Special rules apply to property inherited from people who died in 2010.)
  • Consult IRS Publication 551: Basis of Assets for more information about these situations.

@TryingToUseTT 

 

 

April 23, 2025

i AM A FIRST TIME USER OF TURBO TAX FOR SUB CHAPTER S. HOW DO I ENTER COSTS INCURED OR IMPROVEMENTS MADE PRIOR TO MY USE FO YOUR PRODUCT?

 

PatriciaV
Employee
April 23, 2025

For a Rental Property, you would report one asset for the residence itself then as many more as you need to report each improvement made over the life of the property. As you add these assets, TurboTax will calculate an estimate of the total depreciation you should have taken since the asset was first placed in service. If your records show a different amount, you'll be able to enter that number instead.

 

Note that an S-Corp tax return must be prepared using TurboTax Business

 

Additional Info:

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