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Because of a short term (2 - 5 year) relocation, we plan to rent our home and return to it when we retire. How should we time maintenance and improvements made in preparation for the rental period to insure that they can be used as rental property expenses?
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I'm not a lawyer or an accountant so this is worth what you are paying for it, which is $0.00. However, I have been in a similar situation to you. My read on the IRS publications was that repairs etc. that you make are deductible against rental income even if your property is not rented. What matters is your intention to rent it. So, if you have the floor refinished or the walls painted in anticipation of a rental, that's OK. What I am not clear on is whether you are on firm ground if you are still living in the place when this happens. My guess is that this is subject to interpretation. Probably, although I do not know, you couldn't deduct work that was done a year in advance of your move.

Another thing you will want to think about is depreciation. You can depreciate real rental property according to some formula. Of course, if the place appreciates, then you will have to pay taxes eventually. As it happens I am getting positive cash flow from my property and have chosen not to take any depreciation.

You might wish to check out the IRS Web site -- they're www.irs.ustreas.gov. They try to be user-friendly, if you can believe it.
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[[Because of a short term (2 - 5 year) relocation, we plan to rent our home and return to it when we
retire. How should we time maintenance and improvements made in preparation for the rental
period to insure that they can be used as rental property expenses?]]

Generally speaking, improvements will be required to be deprediated over a fixed term (based upon the depreciation rules). Improvements can be deductible as a rental expense only after the property is available for rent (even though it may not actually be rented at the time). Obviously, the property is not "available for rent" if you are still living there.

It would be best for you to be gone before completing any of the improvment or repair items. Heck, you can even make the improvements or repairs when the new tenant has moved in (which would certainly insure that the repairs/improvements are rental related).

For additional reading on how to deal with rental property from a tax standpoint, check out IRS Publications 527 and 946. They will explain this in much more detail. After reading these publications, if you have any additional questions, feel free to post 'em here.

TMF Taxes
Roy

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Thanks for the very helpful reply. I do understand the difference between deductions and depreciation - and it looks like we should save deductible repairs for right after we move out, when the house is "for rent". I had completely forgotten that we have rented out this house before, in tax years 1984 and 1985, and had taken depreciation then. Does this have any effect on our current situation? And when figuring the basis, what about remodelling done after the first rental period?
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mneudorf,

I am now somewhat out of my depth. Maybe Pixy will help with a citation of the relevant IRS publication. But I think the depreciation you took reduces your basis when it comes time to sell. With respect to remodelling, I think it depends on the nature of what you did. I think painting wouldn't count towards increasing your basis. Replacing worn carpet wouldn't count. Replacing old windows with new energy-efficient ones probably would count. Finishing an attic or a recreation would probably count. Anything requiring a building permit would count.

I replaced carpeting with hardwood floor in a bedroom so that I could raise the rent for my new tenant. As a landlord I'm sure that's deductible. If I lived in the place myself, I'd put it in the "probably counts" class.

Please remember that this advice is worth what you are paying for it, which is $0.00.
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[[Thanks for the very helpful reply.]]

You are certainly very welcome!!

[[ I do understand the difference between deductions and
depreciation - and it looks like we should save deductible repairs for right after we move out, when
the house is "for rent".]]

That would certainly be my suggestion. And I'm glad that you are aware of depreciation and how it works.

[[ I had completely forgotten that we have rented out this house before, in tax
years 1984 and 1985, and had taken depreciation then. Does this have any effect on our current
situation?]]

Not really on your current situation per se, but certainly on the basis of your property for depreciation purposes.

Remember that for depreciation purposes, you must depreciate the cost of the property (plus improvements) OR the FMV of the property, whichever is LESS. I'm guessing that your basis in the property is less than the FMV. So you would have to use as your new basis (before any current improvements) the basis that you "left off" with when the property was rented in prior years. In effect, you don't get to "ignore" that prior depreciation when computing the basis for depreciation on the property now.

[[ And when figuring the basis, what about remodelling done after the first rental period?]]

It adds to the basis of the property.

I feel like I'm rambling. Let me try an example.

Property cost of $50k including land. In 1984 and 1985, you took depreciation of $1,500. In 1989 (when it was your principal residence), you had a remodel that cost you $10,000. You now decide to rent the property. Your basis for the property (assuming that the basis is less than the FMV of the property)is computed as follows:

1. Original cost: $50k
2. Add: Remodel of $10k
3. Less: Prior depreciation of $1,500

For an adjusted basis at this time of $58,500.

Make any sense?? I sure hope so. If not, please post again.

TMF Taxes
Roy

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Just read your post and I realize much time has passed, but thought I'd reply anyway. In a similar circumstance, I was surprised to find that because we we occupied the house more than 14 days in the year of conversion from residence to rental property, the rental was forevermore treated under vacation home rules (even though we didn't occupy it at all after the conversion).

As I recall, the consequence of that is that your expenses plus depreciation can't exceed rental income, so it doesn't serve to shelter other income. Just want you to go in with your eyes open. If this is an issue for you you may want to confirm it with a tax lawyer or someone else here.

Bob
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[[Just read your post and I realize much time has passed, but thought I'd reply anyway. In a similar
circumstance, I was surprised to find that because we we occupied the house more than 14 days in
the year of conversion from residence to rental property, the rental was forevermore treated under
vacation home rules (even though we didn't occupy it at all after the conversion). ]]

If I understand what you are telling me, I don't think that your information is correct. It MIGHT be correct in the year that the property was "mixed use", but certainly not correct in the years FOLLOWING the conversion.

[[ As I recall, the consequence of that is that your expenses plus depreciation can't exceed rental
income, so it doesn't serve to shelter other income. Just want you to go in with your eyes open. If
this is an issue for you you may want to confirm it with a tax lawyer or someone else here.]]

That's very basically correct...for "mixed use" property. But, again, this might only apply in the year of conversion, and should NOT have applied in any years after the conversion from personal property to rental property.

TMF Taxes
Roy

Want to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. There is still time available to do that tax planning (and tax saving) before the end of the year. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Pay special attention to the "archives" section. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.
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