Tax considerations for rental property renovation and repair

surprising

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I am currently repairing and renovating a rental property that is vacant after over a decade with a single renter. There is a lot of repair and improvements. I understand improvements need to follow a depreciation schedule, but I also will have quite a significant amount of repair expenses (painting entire interior, new stove, plumbing issues). I anticipate over $10K of repair and I will have a significant rental loss because of it. I am trying to understand how that works for rentals.

I have other rentals that will have gains. Can the loss of one rental be offset by gains from other rentals, like capital gains/losses for stock?

If I have a net loss, is there a maximum amount of losses I can claim like the capital loss of $3000 for stocks? Am I able to carry any remaining forward to future years like stocks?
 
The loss rules for rental real estate vary depending on the situation.

I'd recommend starting with the instructions for IRS Schedule E and a good Nolo book on rental real estate from your local library.


The new stove might need to be depreciated.
 
We have multiple rentals and if one is +$500 and another is -$100 we pay tax on $400. A possible wrinkle: we don't have a LLC; I know some who have separate LLCs for each investment property - no idea if offsetting works in that case. We do have a tax person, so don't take these comments as gospel, and we don't run rentals at a loss, but I'd guess that carryover losses might be like stocks.
 
For the kind of money you are investing, it might be worth hiring a CPA to help figure this stuff out. Our CPA (that always did our taxes) was invaluable in helping us navigate the issues of our one rental property. YMMV
 
I echo calmloki's comments with the added comment that the LLC are also offsetting each other or privately held properties when it is all added up.

Regarding the depreciation of the range, it can go on a five year depreciation schedule or be expensed in one year provided it is under $5k I believe.

We've had a significant update last year of a long-term tenant and it resulted in a loss for that property, but it was offset from the positive result from other properties.

The difference between capital improvement and repair for a rental property is as follows:
  • Repairs maintain the property’s condition.
  • Capital improvements add value or extend the useful life of the property.
  • Repairs are deductible in the year they occur, while capital improvements must be depreciated over time.
  • If something improves the value of the property or extends its life, it is considered a capital expense.
I would consider repairs to the plumbing system as bringing it back to habitable condition. This would improve the value of the property, but the property would not be rentable without repairs and therefore I would expense it as a repair. A new plumbing system would be a capital improvement as it would extend the life of your building.

You should do the research however.
 
I echo calmloki's comments with the added comment that the LLC are also offsetting each other or privately held properties when it is all added up.

Regarding the depreciation of the range, it can go on a five year depreciation schedule or be expensed in one year provided it is under $5k I believe.

We've had a significant update last year of a long-term tenant and it resulted in a loss for that property, but it was offset from the positive result from other properties.

The difference between capital improvement and repair for a rental property is as follows:
  • Repairs maintain the property’s condition.
  • Capital improvements add value or extend the useful life of the property.
  • Repairs are deductible in the year they occur, while capital improvements must be depreciated over time.
  • If something improves the value of the property or extends its life, it is considered a capital expense.
I would consider repairs to the plumbing system as bringing it back to habitable condition. This would improve the value of the property, but the property would not be rentable without repairs and therefore I would expense it as a repair. A new plumbing system would be a capital improvement as it would extend the life of your building.

You should do the research however.
Some of these issues may also be state specific, so that's another reason I would suggest a local CPA but YMMV.
 
OP. Your question is a little confusing? You state you own other rental properties? If so, Why are you
asking "basic" questions "every" hands on Landlord understands. (One who prepares their own Schedule E).

You must already be using an Accountant to prepare your returns. (you have other rentals).
IMHO, just give your Accountant, the requested info at tax time, and relax. :)
No need to try and understand the income tax laws.

ie. Been a Landlord over 50+ years, Calif. Prepare my own income taxes.
 
OP. Your question is a little confusing? You state you own other rental properties? If so, Why are you
asking "basic" questions "every" hands on Landlord understands. (One who prepares their own Schedule E).

You must already be using an Accountant to prepare your returns. (you have other rentals).
IMHO, just give your Accountant, the requested info at tax time, and relax. :)
No need to try and understand the income tax laws.

ie. Been a Landlord over 50+ years, Calif. Prepare my own income taxes.
Never had a loss before so never needed to figure that out. Sorry for the ‘basic’ question.

No accountant. Just me and TurboTax. I am sure TT would’ve done the right thing but I always go through it’s work just in case.
 
Never had a loss before so never needed to figure that out. Sorry for the ‘basic’ question.

No accountant. Just me and TurboTax. I am sure TT would’ve done the right thing but I always go through it’s work just in case.
In that case, yes, the losses of repairs and depreciations of durable items will directly offset the income from other rentals. If income from other rentals is less than the total loss then you carry forward the "left over" loss to the next year. That is how I see my Schedule E has been working for years. I do my own tax return using TT.

PS: If you have multiple rentals then TT will allocate pro-rated portion of allowed losses to rentals with income.
 
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I am currently repairing and renovating a rental property that is vacant after over a decade with a single renter. There is a lot of repair and improvements. I understand improvements need to follow a depreciation schedule, but I also will have quite a significant amount of repair expenses (painting entire interior, new stove, plumbing issues). I anticipate over $10K of repair and I will have a significant rental loss because of it. I am trying to understand how that works for rentals.

I have other rentals that will have gains. Can the loss of one rental be offset by gains from other rentals, like capital gains/losses for stock?

If I have a net loss, is there a maximum amount of losses I can claim like the capital loss of $3000 for stocks? Am I able to carry any remaining forward to future years like stocks?
Yes, net rental losses on a property offset rental gains on other rental properties... all reported on Schedule E. Net losses are deductible against other income as I recall.

Losses reported on Schedule E can impact Form 1040 income in the following ways:
  1. For taxpayers with adjusted gross income (AGI) below $100,000, up to $25,000 of rental losses can be deducted against other income on Form 1040
    https://www.therealestatecpa.com/blog/ultimate-guide-irs-schedule-e
  2. If AGI is between $100,000 and $150,000, the $25,000 deduction is gradually phased out
    https://www.therealestatecpa.com/blog/ultimate-guide-irs-schedule-e
  3. For those with AGI over $150,000, rental losses generally cannot be deducted against other income on Form 1040, unless the taxpayer qualifies as a real estate professional
    https://www.therealestatecpa.com/blog/ultimate-guide-irs-schedule-e
 
Yes, net rental losses on a property offset rental gains on other rental properties... all reported on Schedule E. Net losses are deductible against other income as I recall.
That is what I was looking for, thanks for that. So I will be in the 3rd category for 2024, and any net loss from real estate can't be used to offset other income, but that loss can be carried forward to the next year. Next year I'll probably be in the 1st category.
 
Like stated above, it all works out on Schedule E with multiple properties. With that said, in years I had a lot of expenses, sometimes I didn't include all of them so I could show at least a small positive income since negative rental income is a red flag for audits. If you have all your receipts and don't mind the increased chance of an audit, go ahead and report exactly as your numbers dictate and take the loss.
 
Like stated above, it all works out on Schedule E with multiple properties. With that said, in years I had a lot of expenses, sometimes I didn't include all of them so I could show at least a small positive income since negative rental income is a red flag for audits. If you have all your receipts and don't mind the increased chance of an audit, go ahead and report exactly as your numbers dictate and take the loss.
I to worry about being audited. Especially, when I have "really" high expenses. (both depreciation and expenses). This year, I had approximately, $ 74,000 in expenses.( ie. Replace HVAC, all house sewer lines,
including main drain, repairs after Tenant left. )

What works for me. I type up a "separate" one page summary. Listing all of my expenses. Names, addresses,
dates, of all companies used. Very detailed, but concise! And I always, say, If more detailed info. required,
I can provide. So, far. This has worked. No IRS audit. Not to worried about "red" flags. I am following the
letter of the IRS law. Just sometimes, bad luck being a Landlord. Legitimate expenses. So I will take all. :)

Attach sheet to my Schedule E.
 
My son is a new landlord this year, renting out one room in his 3br2ba home.

Since I help my kids file their taxes, I read up on Schedule E and rental income so I can help him with his taxes here in a few months. (I needn't have bothered; he researched the rules as well and possibly knows them better than I do.)

Anyhow, I was mostly paying attention to his situation, but in the process of reading, I noticed that there are a number of complicated factors in determining how to deal with rental losses. I know one of those factors is whether or not you are actively involved in the rental properties; I think others might be whether it is your personal use property also and the ratio of rental use days and personal use days.

All that to say, I would encourage OP and others to ensure that the rules that people have described here also apply to them. There are several blanket statements in this thread about how losses are treated. I think it is possible that people are generalizing rules based on their specific circumstances. If OP's circumstances differ, then it's possible that the tax treatment of losses differ.
 
My son is a new landlord this year, renting out one room in his 3br2ba home.

Since I help my kids file their taxes, I read up on Schedule E and rental income so I can help him with his taxes here in a few months. (I needn't have bothered; he researched the rules as well and possibly knows them better than I do.)

Anyhow, I was mostly paying attention to his situation, but in the process of reading, I noticed that there are a number of complicated factors in determining how to deal with rental losses. I know one of those factors is whether or not you are actively involved in the rental properties; I think others might be whether it is your personal use property also and the ratio of rental use days and personal use days.

All that to say, I would encourage OP and others to ensure that the rules that people have described here also apply to them. There are several blanket statements in this thread about how losses are treated. I think it is possible that people are generalizing rules based on their specific circumstances. If OP's circumstances differ, then it's possible that the tax treatment of losses differ.
I agree with your observations. Sometimes, best to have a Tax professional do the "rental" income tax return
the first year. Then, Review the return. If you understand. Then, the following year, use the income tax return as a guide for subsequent tax year. :)

IMHO, the most difficult concept to understand is Depreciation. What "life" to use. MACRS. Sometimes,
Federal depreciation rules do NOT match your State rules. So you have to make "adjustments" when
preparing the your State return.:mad:
Also, currently, there is a Fed rule. Allows you to option of depreciating or expensing certain items.
But is being phased out. Can be very confusing.

Also, I know, some Landlords. Find depreciation to confusing. So they skip it. Do not take Depreciation.
I tell them. If you sell your rental property. the IRS, will come and tax you for the "depreciation" you never took. Hard to believe, but true.:mad:

AS far as renting a room out. " I'm not recommending this. " But I think most people just deal in cash
and do not report the income. (just be sure the Tenant does not take "renter's" deduction, allowed in
California). Otherwise, you can be "caught".
 
Like stated above, it all works out on Schedule E with multiple properties. With that said, in years I had a lot of expenses, sometimes I didn't include all of them so I could show at least a small positive income since negative rental income is a red flag for audits. If you have all your receipts and don't mind the increased chance of an audit, go ahead and report exactly as your numbers dictate and take the loss.
I disagree or have been lucky in over 20 years.

When I have a lot of expenses, I claim them, and add in deprecation and am often (-) .
Frankly considering the depreciation, most rentals are a paper loss pretty easily.

As long as the expenses are real, it's pretty easy to prove.
 
In my opinion, the expense vs deductible decision sometimes hits a gray area.
In those cases I pick whatever is better for me, knowing that deductible means I get back a small portion of the expense over many years. Balanced off by knowing that depreciation that can be added back onto the rental decreases the depreciation recapture at selling.
 
I to worry about being audited. Especially, when I have "really" high expenses. (both depreciation and expenses). This year, I had approximately, $ 74,000 in expenses.( ie. Replace HVAC, all house sewer lines,
including main drain, repairs after Tenant left. )

OUCH..... That would hurt.

Due to my circumstances, I'd depreciate many of those things.

Sometimes on the depreciation decision, especially if I need expenses to offset income, and feel some large item is truly a depreciation candidate, I will expense the taxes and the delivery on it, as they really are separate from the item cost. Rather than just automatically including them.
 
FWIW this is my accountant's reply when I question why he didn't expense more of my post tenant renovation costs in an 1890 Victorian which hadn't had maintenance or repairs for decades:

I have put them under improvements as I did with the other renovations in the past. You’ll get the benefit under depreciation and not being audited
😊
.
 
I need to make some tough decisions about my rentals.

I bought my rentals back during the aftermath of the 2008 financial crisis. At the time, they were extremely cheap and the rents provided a nice income after expenses. Fast forward 10+ years and the financials don't make as much sense anymore. Rents are reasonably priced, but costs are going up way more. HOAs and property taxes have gone up significantly. Return on current value range from 1.5% to 4.5%. Any large repair or maintenance could wipe out any possibility of gains. Our recent $20K renovation will take years to recoup with the increase in rent. The property values have gone up significantly, so I'm pretty sure I can make more selling and investing. I am not sure how anyone could buy a property today and rent it and not lose money in my area.

When I was working, I knew things weren't great, but we weren't losing money and the homes were appreciating. Now after retiring, I really think this equity needs to be working for us better. In the tune of The Clash - "Should I Rent or Should I Sell??"
 
You should probably sell. You have seen a huge market runup since 2008, take the cash and retire (for real).
 
If as you suggest trying to rent these properties is now problematic, perhaps you should sell them with the idea of personal dwellings rather than as rentals. Most who would want them as rentals would ask you about your cash flow, cost, return, etc. An honest answer on these would likely doom the sale. SO, I'd suggest "fixing" them as personal dwellings and not as suitable rentals (which likely would not be perfect as individual dwellings.)

We sold our only rental. But we lived in it for 2 years and totally rehabbed the place in preparation for sale. It was an "okay" rental, but a very nice personal dwelling when we got done. It did cost a fair amount to get it ready for sale, but we got top dollar with sale in 4 days.

Just a thought as I'm no expert on this subject. Good luck.
 
I am in the exact situation but I worry about the huge taxes. I bought the property really low around the same time frame as you. I thought about a 1031 exchange to DST but the returns are so low and you lose control. I don’t have any advice for you because I feel like I am in a bind.
 
I am in the exact situation but I worry about the huge taxes. I bought the property really low around the same time frame as you. I thought about a 1031 exchange to DST but the returns are so low and you lose control. I don’t have any advice for you because I feel like I am in a bind.
It's not for everyone, but you could live in the rental (used to be for 2 years) and then sell as personal residence with exemption. I don't know the rules now but it w*rked like a charm for us though YMMV.
 
It's not for everyone, but you could live in the rental (used to be for 2 years) and then sell as personal residence with exemption. I don't know the rules now but it w*rked like a charm for us though YMMV.
Its not as lucrative anymore. Once a business property, it's always a business property, and you end up paying a factor of the taxes based on (years rented / years owned).
 
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