Rental Property Improvements and Expenses

Forum|Forum|3 years ago
March 20, 2023
1 reply
0 views

Acquired a vacation/short term rental property through a 1031 like kind exchange in 2021. The property required extensive renovation which was completed in 2022. The property was placed in service in 2022. Will all the capital improvement costs and the carrying expenses incurred in 2021 and 2022 during the renovation process be added to the cost basis of the property and be depreciated on different schedules starting in 2022?

Not A Product Question

DianeW777

Yes, you will add the renovations and costs as a new asset after the trade and you can use the date in 2022 when you placed it in service. The asset(s) you already had on depreciation as the original asset(s) will continue as though nothing has changed.

Only the additional money paid and loans taken over, along with renovations will be part of the new asset for your vacation rental.

If there was no personal use you can review the 'idle' property rule for the original asset(s).

Idle Property

Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it isn’t available for rent.

IRS Publication 527

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

OverBurdenedTaxPayerAuthor

Just to confirm, the basis of like kind property received in the 1031 like kind exchange is the same as the adjusted basis of the real property given up and carryover basis as described in chapter 4 of PUB 946?

Does the depreciation continue on as though the real property given up was still being depreciated? The property given up had been depreciated for 7 years, so the first depreciation for the received property would be for year 8 with 19.5 years of depreciation remaining?

What MACRS classification and schedule do the carrying costs (utilities, insurance, interest, taxes) get and are they starting at year 1 or 8?

Are the remodeling costs the same as excess basis?

Will these costs have a schedule of 27.5 years and will they start at year 1 when the property is placed in service?

Also, turbo tax did not create Form 4562, asset work sheets or asset life history documents for the received property. Is this because the received property was not put in service in the same year as the exchange?