Sch E Rental Expenses during renovation etc.

[Note: Early morning April 15, 2019 the Emergency Squad rushed me to the hospital as I was having a
heart attack. Fortunately everything due by 4/15/19 was delivered to clients or extensions filed. After a
triple bypass and a long recovery I am now 80% back. Now trying to catch up on the few weird fact
complicated extensions.]

Question: Cash basis taxpayer with a former home that he has rented for decades. Long term tenant
moved out June 30, 2018 Lots of damages beyond ordinary wear and tear. Client spent rest of 2018
doing major repairs. Did not re-rent until Feb. 2019.

Expenses July - December 2018

1. Repair Foundation deterioration 6,700
2. Replace carpeting 1,300
3. Renovating Kitchen/Bath 14,000
4. Water heater 630
5. Furnace Repair 300
6. R.E. Tax paid Dec. 2018 2,870

I assume all those expenses for Jan-June would be on a 2018 Sch E.
Using a "when placed in service" criteria all costs July-Dec 2018 for repairs and renovations would be
on 2019. So what do I do with real estate taxes, insurance and utility costs July-Dec 2018?

Can I apply the forfeited $600 deposit to any of this.

This is a modest rental with a market value of about $130,000, taxpayer is single and has about
$45,000 in taxable pension income. No big dollars at stake. I appreciate any advice you all can
provide. Thanks for your help. I realize this is likely not a black and white scenario.

The rental property is still a rental property during the period of time between tenants. The vacancy is in interruption in income but expenses still occur. All expenditures normally associated with the rental are listed as expenses on Sched E. The $600 is income at the point you decide to not return it. All the renovation related costs are capitalized. Depreciation of the renovation starts when the house is ready and available for rent, which may be some time before the new tenant is located and starts paying rent.

The "repair foundation" was needed because gutter and drainage issues that prevented rain water to flow away from the structure. I hesitate to categorize that as a "repair" vs. an improvement. Am I being too conservative? Due to this item and the r.e. tax the 2018 loss would be about $6,000 - only $4,700 in rental income for that 6 months.

In the big picture scheme I do not see this as a major home renovation . There were a lot of small things that took some coordination so that's probably why it took 7 months to do the repair. I would capitalize kitchen and bath renovation and everything else is expense

Was it available for renting? Does not look like major anything except for kitchen/bathrooms. When was it rented again?

Welcome back. Glad you have mostly recovered. Your last post before this topic was shortly after midnight (EDT) on April 14. The 14th must have been a tough day. Take care.

Jake! Welcome back and I am so glad that you are ok. How scary! If you required a triple bypass, problems must have been brewing for a while, but 4/15 stress could not have been helpful.

Repair Foundation deterioration 6,700

We consider RABI under the tangible property regulations, right? So was this a restoration, adaptation, betterment, or improvement? It sounds like you were restoring the foundation, in which case this would be capitalized. But was the deterioration due to normal wear and tear? If so, expense as a repair. We are supposed to look to the cost compared to the unit of property. A material cost looks more like a capitalized item.

If it must be capitalized, then don’t forget about the partial disposition election to see if you can write off some portion of the old foundation.

Replace carpeting 1,300

I’d capitalize, assuming this is a sizeable portion of the carpet. Don’t forget to take the old carpet off the depreciation schedule.

Renovating Kitchen/Bath 14,000

Capitalize, and again, don’t forget about the partial disposition election.

Water heater 630
Furnace Repair 300

Under the $2,500 DMSH. Expense

R.E. Tax paid Dec. 2018 2,870

Taxes paid during the construction process…I don’t remember.

Forfeited deposit is income, assuming you did not take it into income originally. I agree that depreciation of capitalized assets begins when you hold the property out for rent.

Those are my thoughts. Hopefully Brian will be along soon. This is right up his alley.

Forfeited deposit is income, assuming you did not take it into income originally. . Probably. but it could also be, under the origin-of-the-claim theory, a reduction in the expenses, with no particular difference in result unless you allocate some of it to a reduction in basis of the items you capitalize. I wonder if that works.

Replace carpeting 1,300

I’d capitalize, assuming this is a sizeable portion of the carpet. Don’t forget to take the old carpet off the depreciation schedule.

Wouldn't this expense qualify for the DMSH as well?

Whoops! Sorry! Of course.

Replace carpeting 1,300

I’d capitalize, assuming this is a sizeable portion of the carpet. Don’t forget to take the old carpet off the depreciation schedule.

Wouldn't this expense qualify for the DMSH as well?

Re DMSH - isn't there a two pronged test? The dollar amount and not more than 2% of the non-adjusted basis?
The non-adjusted basis of this home (fully depreciated some years ago) was $35,000. 2% of that is $700.

Re DMSH - isn't there a two pronged test? The dollar amount and not more than 2% of the non-adjusted basis?
The non-adjusted basis of this home (fully depreciated some years ago) was $35,000. 2% of that is $700.

No, you are thinking of Safe Harbor for Small Taxpayers § 1.263(a)-3(h) (SHST).