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Ohio_Remodeler
Sep 10, 2008, 10:53 PM
I purchased a property in May of 2006, it took 18 months to fix it up and it was not "placed in service" rented until January of 2008.

It is my understanding that I can not claim depreciation for the 18 months where it was unavailable for rent. I believe I can add the cost of the improvements to the basis of the property and depreciate them over the life of the building. However, I am confused on how to account for the cost of utilities, property taxes, mortgage interest and insurance for the 18 months while the property was under renovation.

Do these costs just build up and I put them on my Schedule E when I file in 2008? Are these expenses added to the basis of the property or are they just lost?

Please let me know which line of my tax return to put the cost of utilities, property taxes, mortgage interest and insurance for the 18 months the property was vacant.

AtlantaTaxExpert
Sep 11, 2008, 11:53 AM
You CAN claim the costs of utilities, property taxes, mortgage interest and insurance for tax years 2006 and 2007 on Schedule E for the tax returns for THOSE years.

You will need to amend the tax returns for those years if you did not claim these expenses. Just complete the Schedule E without the rental income and show the loss from these expenses.

Further, In my opinion, you CAN depreciate the property in 2006 for the original purchase price of the property (plus the closing costs), then in 2007 for the added costs of the improvements as a separate line item on the Form 4562. The fact that you have rented the property in Jan 2008 clearly shows your intent to use the property from day 1 as a rental property. Hence, it was "placed in service" the day you bought it and you ARE allowed to claim depreciation while fixing it up.

The only time this would be in doubt is if you previously lived in the house and "converted" the house to a rental after moving. In that case, the "placed in service" date would be subject to question.

Finally, your situation SCREAMS for professional tax help. I strongly recommend you find a competent tax professional to do your return and the amendments for 2006 and 2007.

Ohio_Remodeler
Sep 16, 2008, 10:55 AM
I have further researched this and have found part of the answer. I am now certain that I can not deduct the depreciation expense for this building in 2006 or 2007.
According to the IRS per this link:

Publication 946 (2007), How To Depreciate Property (http://www.irs.gov/publications/p946/ch04.html#d0e4395)

Here is how they define placed in service:

What Is the Placed-in-Service Date?

Terms you may need to know (see Glossary):
Placed in service

You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. The placed-in-service date for your property is the date the property is ready and available for a specific use. It is therefore not necessarily the date it is first used.

Since the use for this property is to generate rental income, it was not placed in use until it was ready to be rented. It was under construction and not ready to be rented until 1/1/08.

I still need an answer to this question:

How do I account for the cost of utilities, property taxes, mortgage interest and insurance for the 18 months while the property was under renovation?

Do these costs just build up and I put them on my Schedule E when I file in 2008? Are these expenses added to the basis of the property? Or do I put them on the Schedule E for 2006 & 2007 with no rental income and no depreciation deduction?

AtlantaTaxExpert
Sep 17, 2008, 07:47 AM
Okay, I concede that you cannot claim depreciation until you start to rent the property.

However, in order to claim the utilities, taxes, interest and insurance costs, you must submit the Schedule E in the tax years that these costs were incurred. That means you will need to amend your 2006 and 2007 tax return.

You CANNOT claim all the accrued costs on your 2008 return.

wgraves
Dec 12, 2010, 10:22 AM
I'm Bill from Tujunga, CA and I'm in a similar situation to the Ohio Remodeler. For what it's worth, here's my response: I don't think there is any way you can add an asset to schedule E until your rental property is placed in service which means you cannot amend previous schedule E's on prior tax returns. I think the "Atlanta Tax Expert" is mistaken. I don't think you can deduct interest, property tax, etc. in prior years. However, I think you can capitalize the interest, property tax, etc you paid while the property was under construction by adding those expenses to your depreciable basis. I think the IRS considers those costs a part of the cost of construction. But please beware, I don't know this for a fact and the AtlantaTaxExpert could be correct but if I'm wrong, then onto which tax form would you deduct your prior year's property tax payments? You can't do it on Schedule A and neither can you deduct your interest on schedule A. I hope there's somebody out there who can answer this question.