Question

Question about depreciation on a new vacation rental

Forum|Forum|5 years ago
February 20, 2021
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Hello. We bought a vacation home in 2020 that we renovated and listed as a short-term rental in December 2020 but didn't actually rent out until 2021. We had about 25k in renovation expenses incurred in 2020 but no income in 2020. Will have approximately 30k income in 2021. I'm wondering if the rental property should be set up in our 2020 or 2021 taxes, if these expenses should/can be deducted in our 2020 return, if we need to wait until 2021 when we have demonstrated rental income and deduct the expenses from 2020 retroactively, or if we're not allowed to deduct 2020 expenses at all since we listed but did not get any rental income until 2021. I hope that question makes sense! This property will be a vacation home rented out consistent with the rules about the number of days we need to stay there. Thanks for any help. I was in the Turbo Tax interface and could not figure out what to do.

A

AnnetteB6

Since you placed the rental property in service by advertising it and having it available to rent in 2020, then you will begin reporting it on your 2020 tax return regardless of whether you collected any rental income in 2020.

Expenses for maintaining the property after it was placed in service will be deducted as rental expenses. Expenses you incurred doing any major renovations will be added to the cost basis of the property and depreciated over time as part of the total cost of the property.

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A

alexfuAuthor

Thanks, AnnetteB6. That was my understanding. However, I am confused about where I should be doing that in Turbotax.

I tried to set up the new property under "Wages & Income" > "Rental Properties and Royalties Sch. E." I answered that I am not a real estate professional. I then entered my property location and ownership information. It asked me what type of rental this is, and I answered "Vacation or short-term used for personal purposes and rented for short-term period." It then asked my "Do any of these situations apply to this property?" and I checked "New: 2020 was the first year I rented this property" and "Converted: "I converted this property from personal use to a rental in 2020." The next screen is "Was this property rented for all of 2020?" as well as "Days rented at a fair rental price" and "Personal use during the year." I answered no about renting it for all of 2020, since we bought it in November. I responded 0 days rented at a fair rental price, since we listed it in 2020 but did not actually get a rental before the end of year, and put in our number of personal use days.

When I did this, I got a message that says, "Let's get your rental info in the right place. Since this property wasn't rented at fair market value, it's considered a not-for-profit rental. This means we'll delete this property from your return, and you'll add your income and expenses in a different area. Be sure to enter rent from this property as other reportable income under miscellaneous income and expenses for this property in Deductions and Credits. Expenses can't be higher than rent you received. If you don't want to delete this property, you can go back and review the number of days rented at fair market value." There's then a button to delete the rental. But I should be able to set up the rental and depreciate the 2020 expenses without having any income in 2020 since I listed it.

I must be doing something wrong. Can you help me figure out what mistakes I made here?

A

AnnetteB6

TurboTax wanting to report the property as a not-for-profit rental because you indicated that you had personal use days, but no rental days.

The date that the property was first advertised for rent is the date it became a rental property. You do not count any days that you used the property prior to that time as 'personal' use. Personal use days only become a factor after it is being advertised. Also, if you are performing work or maintenance on the property, it is not considered a personal use day.

For your reference, the following TurboTax article may be helpful: Real Estate Tax and Rental Property

@alexfu

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