Rental property tax questions

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HomerJ
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Rental property tax questions

Post by HomerJ »

So my wife and I are thinking about buying a lake house...

The way the IRS handles rentals of second homes (please correct me if I'm wrong) is as follows:

We rent it out 14 days or less... no need to report to IRS... rental income is tax-free.
We rent it out for more than 14 days, and WE only use it 14 days or less, it's considered a rental property and we can deduct everything...

Anything in between gets more complicated.

The one we are looking at needs to be furnished, and painted, maybe new carpet, etc.

Our idea was to rent it out majorly the first year, only spend 2 weeks there ourselves, and deduct everything we could. Then next year, we'd probably switch to renting out only 14 days or less.

Is that plan even feasible? Can we deduct the whole cost of new furniture, new carpet, etc in the first year? Or does it have to be spread out over multiple years?

The other problem is if we buy this year, we're not going to be able to rent it out much (since summer will be over by the time we get it all ready).

My understanding is that you can't deduct more than your rental income, so if we spend $20k fixing it up, but only get $2000 in rental income, the most we can deduct is $2000...

So two questions... Can we deduct everything in the first year? And if so, should we wait to buy until next January so we can fix it up in the spring and have the whole summer to rent it out?
Grt2bOutdoors
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Re: Rental property tax questions

Post by Grt2bOutdoors »

HomerJ wrote:So my wife and I are thinking about buying a lake house...

The way the IRS handles rentals of second homes (please correct me if I'm wrong) is as follows:

We rent it out 14 days or less... no need to report to IRS... rental income is tax-free.
We rent it out for more than 14 days, and WE only use it 14 days or less, it's considered a rental property and we can deduct everything...

Anything in between gets more complicated.

The one we are looking at needs to be furnished, and painted, maybe new carpet, etc.

Our idea was to rent it out majorly the first year, only spend 2 weeks there ourselves, and deduct everything we could. Then next year, we'd probably switch to renting out only 14 days or less.

Is that plan even feasible? Can we deduct the whole cost of new furniture, new carpet, etc in the first year? Or does it have to be spread out over multiple years?No. Cost of new furniture, wall to wall carpeting are considered improvements to the rental property and need to be capitalized and depreciated over the life of the improvement. See Publication 527 at http://www.irs.gov

The other problem is if we buy this year, we're not going to be able to rent it out much (since summer will be over by the time we get it all ready).

My understanding is that you can't deduct more than your rental income, so if we spend $20k fixing it up, but only get $2000 in rental income, the most we can deduct is $2000...
Yes, but you can show losses if your expenses exceed your income, that will rollover to subsequent years when you may be able to recapture it.

So two questions... Can we deduct everything in the first year? And if so, should we wait to buy until next January so we can fix it up in the spring and have the whole summer to rent it out?No. and Yes.
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Offshore
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Re: Rental property tax questions

Post by Offshore »

OP- although you did not mention local and state taxes, I thought this point important enough to mention.

Depending upon the location of your property, there may be both local and state taxes owed. These taxes may be on all rental income, independent of how much owners use the proterty. If you are handling the bookings yourself, you may be using VRBO. VRBO has a sister site exclusively for property owners that functions much like this Bogleheads forum in that newbie and experienced property owners may find high quality answers and suggestions before mistakes are made.

Rental property has been a good thing for us. Most of the Boglehead authors advise against it. Most properties don't produce profit, however, there are other benefits and the decision is somewhat unique to each family/situation. You are doing your homework. Good start.
bungalow10
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Re: Rental property tax questions

Post by bungalow10 »

Like others have said, your improvements, carpeting, furnishings are all depreciated over the course of several years (I believe carpet and furniture is five years, but could be wrong).

You can also deduct depreciation each year... HOWEVER, the detectability of passive losses phases at at around 150k AGI for a couple.
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HomerJ
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Re: Rental property tax questions

Post by HomerJ »

Many thanks for the responses...

That IRS Pub was especially helpful...

This looks really complicated... I guess my wife has a new job now... :)

Main thing is to keep perfect records of everything we do.
PacNorWest
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Re: Rental property tax questions

Post by PacNorWest »

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Last edited by PacNorWest on Sat Oct 19, 2013 1:48 pm, edited 1 time in total.
Grt2bOutdoors
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Re: Rental property tax questions

Post by Grt2bOutdoors »

PacNorWest wrote:New items like furniture, paint, carpeting, etc are deducted at different rates!
If you use software like TurboTax then you can run simulations. . .
As I recall, something like new paint or roof are depreciated over a longer period of time.
Something like a sofa will be depreciated over a shorter period of time.

If you do all the repairs and improvements before you rent it - it will make a difference:
"Repairs you make to a property before it is available to rent are added to the basis and depreciated as improvements." -from TurboTax

Repairs done after rented are deductible.
Sofas, appliances will be depreciated over time.

It gets complicated. The more you educate yourself on tax code the more you can use it effectively.
Repairs after rented are deductible, yes, but let's not confuse what is a repair and what is an improvement. In all instances, an improvement will add to the cost basis of the property - that is whether is a rental or not. Depreciation can only be taken if you use the property as a rental, if you use it solely for your personal use, there is no depreciation. A repair for a rental is something like replacing the toilet handle, changing a valve, installing a faucet. If you replace a window or carpeting or add wood floors, new refrigerator or washing machine (long life duration) -that's not a repair, that is an improvement.
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PacNorWest
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Re: Rental property tax questions

Post by PacNorWest »

Well, I think the OP question was more simplistic. And the answer is "NO".
You cannot spend a bunch of money and then deduct that wad as a rental expense.
You cannot expense it out on your first tax report.
And then convert the "rental" to a second home - fixed up and furnished at government expense.
That is a nice plan, but you can forget about it. It won't work that way.
:annoyed
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FNK
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Re: Rental property tax questions

Post by FNK »

If the question is "can I reduce my tax liability this year", the answer is probably no.

If the question is "can I accumulate tax losses to offset future income from the property", the answer is probably yes.
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HomerJ
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Re: Rental property tax questions

Post by HomerJ »

PacNorWest wrote:Well, I think the OP question was more simplistic. And the answer is "NO".
You cannot spend a bunch of money and then deduct that wad as a rental expense.
You cannot expense it out on your first tax report.
And then convert the "rental" to a second home - fixed up and furnished at government expense.
That is a nice plan, but you can forget about it. It won't work that way.
:annoyed
Heh, yeah I realize that now... :)
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