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  1. #1
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    Default Rental Expenses and Depreciation Carry Over

    I have a condo that I converted into a rental property and it became availble for rent on 11/02/2008. It didn't get rented until 02/01/2009. So although i had rental expenses in 2008, i didn't have any rental income. When i filed my 2008 taxes i could not deduct the rental expenses.

    The research I did at the time indicated that I could carry the 2008 expenses to 2009 tax filing. Now I am doing my 2009 taxes and i have these questions.

    How do I report the 2008 expenses, should I combine them with the 2009 expenses or do I need to show them
    separately on some specail form?

    How do I handle the depericiation? I know how to calculate it, but I am not sure how it needs to be filled in on Form 4562. Do i report it on line 17 or line 19?

    Should I have filed a form/schedule with my 2008 return even though I could not deduct rental expenses?

    Thank you in advance for your help.

  2. #2
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    Default Re: Rental Expenses and Deprerication Carry Over

    You should have reported your expenses from 11/02/2008 through 12/31/2008 on Schedule E of your 2008 tax return. You should have taken depreciation for half of November and all of December. 2008 was the year the property was placed in service. In 2009 you would continue to depreciate the property as property placed in service in a prior year. I don't know where you got the idea that rental expenses could be reported in a year other than the year in which they were incurred or paid, but that is not the case.

  3. #3
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    Default Re: Rental Expenses and Deprerication Carry Over

    Quote Quoting Bubba Jimmy
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    You should have reported your expenses from 11/02/2008 through 12/31/2008 on Schedule E of your 2008 tax return. You should have taken depreciation for half of November and all of December. 2008 was the year the property was placed in service. In 2009 you would continue to depreciate the property as property placed in service in a prior year. I don't know where you got the idea that rental expenses could be reported in a year other than the year in which they were incurred or paid, but that is not the case.
    He may be talking about a loss carryforward.

    thezman, I think this may be a year when it would be in your best interest to use a tax professional. Once you see how it all works one time through, then you may have a better handle on doing it yourself in the future.

  4. #4
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    Mar 2008
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    Default Re: Rental Expenses and Deprerication Carry Over

    Quote Quoting thezman
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    I have a condo that I converted into a rental property and it became availble for rent on 11/02/2008. It didn't get rented until 02/01/2009. So although i had rental expenses in 2008, i didn't have any rental income. When i filed my 2008 taxes i could not deduct the rental expenses.

    The research I did at the time indicated that I could carry the 2008 expenses to 2009 tax filing. Now I am doing my 2009 taxes and i have these questions.

    How do I report the 2008 expenses, should I combine them with the 2009 expenses or do I need to show them
    separately on some specail form?

    How do I handle the depericiation? I know how to calculate it, but I am not sure how it needs to be filled in on Form 4562. Do i report it on line 17 or line 19?

    Should I have filed a form/schedule with my 2008 return even though I could not deduct rental expenses?

    Thank you in advance for your help.
    As to which line of form 4562 it is, a rental condo would fall under residential properties, and under line 19H. None of the property classes under MACRS is applicable.

    As to forgetting to take an expense one year, and then trying to book it another year. this has happened to me. I keep separate checking accounts for personal, as opposed to business expenses. What I do is I make up expense reports from time to time ( usually monthly ) to reimburse myself for mileage on my cars, small purchases I make at local hardware stores for instance, and I also sneak in a re-reimbursement for prior year expenses, say in cases where I paid by credit card for a newspaper ad for a rental, and I haven't yet expenses it for the prior year on the rental business.

    So if I paid for a newspaper ad in the year 2008, I didn't or forgot to deduct it, I would put down on my expense report in the year 2009, "Reimbursement for Newspaper ad", leave out when the ad was placed, and book that expense to advertising. Sneaky?? Yes, but my CPA has no problems with it.

    Years back, I also booked some of these expenses into my "Purchase Expense" capital account in instances where I bought a building, rehabbed it, and spent money on it before tenants moved in. Sometimes I would find a bill I missed some time later, so I just add that item into the Purchase Expense Capital account.

    What I did was in the beginning, I did go to a CPA, then when he retired, and after that I did it for a number of years myself, copying what he had done, till I bought some businesses, and then had a new CPA handle the taxes for the rentals and the business. I always handled the accounting myself, but worked closely with the CPA on the tax issues.

    Making rules on when you capitalize, vs when you expense, and what to do if I forgot something had been issues I worked closely with my CPA on.

  5. #5
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    Default Re: Rental Expenses and Depreciation Carry Over

    It isn't one's CPA that one has to keep happy. If the IRS examined the return and saw 2008 expenses claimed in 2009 they'd disallow it. If we could combine expenses in what ever year we wish there'd be all sorts of games we could play. I don't advise people on what I think they can get away with, I advise them on what the law requires. It's easy enough to amend the 2008 return and do it properly. But the OP expresses a misunderstanding of the tax code in that expenses are indeed deductible even if no rent has yet been collected.

  6. #6
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    Default Re: Rental Expenses and Depreciation Carry Over

    Quote Quoting Bubba Jimmy
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    It isn't one's CPA that one has to keep happy. If the IRS examined the return and saw 2008 expenses claimed in 2009 they'd disallow it. If we could combine expenses in what ever year we wish there'd be all sorts of games we could play. I don't advise people on what I think they can get away with, I advise them on what the law requires. It's easy enough to amend the 2008 return and do it properly. But the OP expresses a misunderstanding of the tax code in that expenses are indeed deductible even if no rent has yet been collected.
    Expenses are deductible in a year that the property is actively available for rent, even if a tenant has not yet been found.

    If the property was ready for a tenant in 2008, and the OP was actively seeking a tenant in 2008 (via newspaper ads or other methods) then its valid to take expenses in 2008.

    However, if the property was purchased in 2008, and refurbishment was going on and the property wasn't ready for a tenant until 2009 then 2008 expenses could not be taken until 2009.

  7. #7
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    Default Re: Rental Expenses and Depreciation Carry Over

    Quote Quoting thezman
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    ... and it became availble for rent on 11/02/2008. It didn't get rented until 02/01/2009.
    In any event, there is no provision in the tax code or IRS instructions that would allow a taxpayer to roll expenses, like depreciation for example, from 2008 onto the 2009 tax return.

  8. #8
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    Default Re: Rental Expenses and Depreciation Carry Over

    Quote Quoting Bubba Jimmy
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    In any event, there is no provision in the tax code or IRS instructions that would allow a taxpayer to roll expenses, like depreciation for example, from 2008 onto the 2009 tax return.
    I would think if the OP "converted" the owner occupied residence to rental, he could consider it owner occupied till year end, and then legitimately take the depreciation starting in the year 2009. After all, it wasn't rented out to well into the year 2009.

    It is not illegal to have an overlap period of a few months when an ower can occupy two homes, while transitioning.

    If he did that, it would be more efficient that he rolled all his out of pocket expenses in 2008 into his purchase expense capital account.

    In my rental business, I had from time to time forgotten to record small assets I placed into service, once quite a number of years ago, in particular, a hot water tank for $700. What we did was if the item went into service in late in one year (say 2008), we would have placed the item into service in the beginning of the following year (say 2009).

    Now, I had a talk with my CPA about it, the long and the short of it is if the IRS is super technical, the hot water tank, depreciated over 5 years would have had several months of depreciation disallowed, something in the neighborhood or $50.00, affecting taxes by well under $10.00. The question is whether it pays to amend a whole year's tax return for the $10.00, or is it worth it for the IRS auditor to make a stink about such an item.

    Then again, it is reasonable that one can pay for something at some point in time, and place it into service at a later time.

    In order to spot these descrepancies, an auditor would have to go through hundreds of asset accounts of mine, pick one out, compare it to the receipts when the asset actually went onto service.

  9. #9
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    Default Re: Rental Expenses and Depreciation Carry Over

    If he did that, it would be more efficient that he rolled all his out of pocket expenses in 2008 into his purchase expense capital account.
    Sorry, that will not fly. You cannot consider the property as in service on Nov. 2, calculate expenses from Nov. 2 through Dec. 31 (advertising, taxes, mortgage interest, depreciation, etc.) and then deduct those expenses on the next year's tax return. Or add those expenses to the basis. Now, if the home required some renovation before being rented that could be added to the basis. But what the OP proposed is incorrect, and why would he not want to deduct those expenses against his other 2008 income by amending and filing schedule E? Why all the contortions? He did not believe he could deduct them in 2008, and that is not the case.

  10. #10
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    Default Re: Rental Expenses and Depreciation Carry Over

    Quote Quoting Bubba Jimmy
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    Sorry, that will not fly. You cannot consider the property as in service on Nov. 2, calculate expenses from Nov. 2 through Dec. 31 (advertising, taxes, mortgage interest, depreciation, etc.) and then deduct those expenses on the next year's tax return. Or add those expenses to the basis. Now, if the home required some renovation before being rented that could be added to the basis. But what the OP proposed is incorrect, and why would he not want to deduct those expenses against his other 2008 income by amending and filing schedule E? Why all the contortions? He did not believe he could deduct them in 2008, and that is not the case.
    In case I wasn't clear, I mean booking to a "purchase expense capital account" which IS a component of the basis, so what I am saying is "bookkeeping" lingo as compared to "tax" lingo, i.e. is "adding to the basis". This account is where all the closing expenses are normally booked to when purchasing.

    While technically, the OP converted from owner occupied to rental, perhaps a more appropriate term would be a "Property conversion capital account".

    But as I said earlier on, a method which you panned, is to file an expense report to cover those expenses. I handle employee expense accounts, and some employees hand them in consistently months late, so the company wind up expensing 2008 expenses in 2009. Of coures, it causes budgeting problems.

    But no company I've been with redid their prior years tax returns to account for employees handing their expense reports late.

    Also, as its was mentioned, if the OP demonstates that he intends to be in the rental business, he can make deductions as an expense in 2008 also, even though he was not fortunate enough to find a tenant that soon. I had these discussions with my CPA as well in years past, for rentals I acquired too late in the year to be able to fill up with tenants.

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