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Lawyers/Tax guys...when does a rental become a rental?

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Lawyers/Tax guys...when does a rental become a rental?

Old 02-10-2018, 06:12 PM
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Default Lawyers/Tax guys...when does a rental become a rental?

Just like the title says, when does a property become a rental? Quick backstory. Bought a condo that was foreclosed and the condo is in great condition, dated, but great condition other than the sofa, bed frame, misc clothes and other stuff the previous tenant left. Other than the couch and bed frame, everything else could be put in trash bags and the whole place cleaned out in an hour to hour and a half. The floors are tile and in great shape. They did take the fridge, but I can get one delivered tomorrow if need be. It could use a fresh coat of paint as most any place could that has been vacated, but there is no damage to any of the surfaces or paint, just smudges and marks from ordinary wear and tear. If I bought it for my personal use, I would have cleaned the trash out Friday morning and started cleaning the bathrooms and floors while waiting for the fridge to be delivered and stayed in it Friday night and started to paint when I had time after work in the next couple of weeks. I took possession of the condo on Thursday and put a For Rent Sign in the window on Friday morning after I changed the locks. I already got two calls on the property.

I looked up the IRS regulations and it only references a property being put in rental service under the section of "When does depreciation begin and end". It goes on to say a property is placed in service in a rental activity when it is ready and available for a specific use in that activity. Even if you aren't using the property, it is in service when it is ready and available for it's specific use. The "when it is ready and available" is pretty vague.

Question is, when does a rental property become a rental property or put in service? At the time I put the sign in the window or when it is up to my wife's standards? If someone was in a pinch and came to me and said they needed a place to live in this weekend and didn't mind helping clean it up and would paint it when they got the time, I would rent it today ( at a reduced rate for 2-3 months). If rented March 1st, it will have new fridge in place, new blinds, new paint and professionally cleaned.

When you respond, please state if you are an attorney or tax person....may help me understand your interpretation and thought process. Won't matter from an IRS standpoint, but may from an attorney's standpoint, the property is in Florida.

Last edited by Diverboy; 02-10-2018 at 06:19 PM.
Old 02-10-2018, 06:25 PM
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What do the condo docs say about renting? Did you pay all the outstanding condo fees and assessments?
Old 02-10-2018, 06:25 PM
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I would think as soon as you put it up for rent, or when you bought it under a LLC for the reason of renting it out, so you can write off what you bought it for and what you put into it to fix it up.

talk to your CPA

But I am no expert on this stuff
Old 02-10-2018, 06:34 PM
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Originally Posted by hottoddie View Post
What do the condo docs say about renting? Did you pay all the outstanding condo fees and assessments?
What does that have to do with when it becomes a rental? But since your so curious about my business, it was foreclosed on by the HOA for outstanding condo fees and assessments...so yeah, they are all paid.
Old 02-10-2018, 06:36 PM
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Some condo associations restrict rentals. That's why I asked. Sounds like that's not an issue.
Old 02-10-2018, 06:38 PM
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Originally Posted by 99yam40 View Post
I would think as soon as you put it up for rent, or when you bought it under a LLC for the reason of renting it out, so you can write off what you bought it for and what you put into it to fix it up.

talk to your CPA

But I am no expert on this stuff

Ummm, why do you think I ask for a CPA or attorney to respond? It can also be bought under a personal name and be used for a rental.You cannot write off what you bought it for, that is addressed under depreciation schedules every year and cost basis when sold. Not everything that you put into it to fix it up can be written off, some things must be capitalized.
Old 02-10-2018, 06:42 PM
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Originally Posted by hottoddie View Post
Some condo associations restrict rentals. That's why I asked. Sounds like that's not an issue.
Sorry, still don't understand what that has to do with when it becomes a rental. The HOA has no bearing on how/when to record things on tax forms.
Old 02-10-2018, 06:43 PM
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The day you started advertising it for rent.
Not the renovations before that time.
Get the NOLO every day tax deduction guid.
It will tell you how to calculate basis.

Read cover to cover.
That would be a good start.

I'm not a lawyer or CPA but I did stay in a holiday Inn.
I'm a landlord and have 11 houses I renovated and put in service.
Old 02-10-2018, 06:56 PM
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Originally Posted by The Bermudian View Post
The day you started advertising it for rent.
Not the renovations before that time.
Get the NOLO every day tax deduction guid.
It will tell you how to calculate basis.

Read cover to cover.
That would be a good start.

I'm not a lawyer or CPA but I did stay in a holiday Inn.
I'm a landlord and have 11 houses I renovated and put in service.
Thanks, I have a bunch of houses as well and they have all needed a month or two or more to get new roofs, A/C's, remodeled or whatever so I have a good handle on that part and never had a problem because I usually have people pushing me to get them done so they can move in and we had rehab cost right up until the day they move in (which is one accounting) and then the tenant occupied accounting starts the next day. This is the first time I've had one like this, so it just brought up a few new questions for me.
Old 02-10-2018, 06:59 PM
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Originally Posted by Diverboy View Post
Just like the title says, when does a property become a rental? Quick backstory. Bought a condo that was foreclosed and the condo is in great condition, dated, but great condition other than the sofa, bed frame, misc clothes and other stuff the previous tenant left. Other than the couch and bed frame, everything else could be put in trash bags and the whole place cleaned out in an hour to hour and a half. The floors are tile and in great shape. They did take the fridge, but I can get one delivered tomorrow if need be. It could use a fresh coat of paint as most any place could that has been vacated, but there is no damage to any of the surfaces or paint, just smudges and marks from ordinary wear and tear. If I bought it for my personal use, I would have cleaned the trash out Friday morning and started cleaning the bathrooms and floors while waiting for the fridge to be delivered and stayed in it Friday night and started to paint when I had time after work in the next couple of weeks. I took possession of the condo on Thursday and put a For Rent Sign in the window on Friday morning after I changed the locks. I already got two calls on the property.

I looked up the IRS regulations and it only references a property being put in rental service under the section of "When does depreciation begin and end". It goes on to say a property is placed in service in a rental activity when it is ready and available for a specific use in that activity. Even if you aren't using the property, it is in service when it is ready and available for it's specific use. The "when it is ready and available" is pretty vague.

Question is, when does a rental property become a rental property or put in service? At the time I put the sign in the window or when it is up to my wife's standards? If someone was in a pinch and came to me and said they needed a place to live in this weekend and didn't mind helping clean it up and would paint it when they got the time, I would rent it today ( at a reduced rate for 2-3 months). If rented March 1st, it will have new fridge in place, new blinds, new paint and professionally cleaned.

When you respond, please state if you are an attorney or tax person....may help me understand your interpretation and thought process. Won't matter from an IRS standpoint, but may from an attorney's standpoint, the property is in Florida.
Sounds like it is ready and available now.

I'm a CPA and a slumlord.

If you want to feel safe in knowing it's 'ready and available', look into whether your municipality requires an inspection or license for the rental, and get that done, but it's not necessary. In other words, if you rented it out without a required rental license, the IRS still wants you report that income, so the fact that you did not get a license or inspection doesn't mean it's not ready and available for rent. But it may make you feel better.

Also, look up mid-month convention. Basically, depreciation starts middle of the month of being placed in service, regardless of actual date of being placed in service.
Old 02-10-2018, 07:19 PM
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Originally Posted by chiung View Post
Sounds like it is ready and available now.

I'm a CPA and a slumlord.

If you want to feel safe in knowing it's 'ready and available', look into whether your municipality requires an inspection or license for the rental, and get that done, but it's not necessary. In other words, if you rented it out without a required rental license, the IRS still wants you report that income, so the fact that you did not get a license or inspection doesn't mean it's not ready and available for rent. But it may make you feel better.

Also, look up mid-month convention. Basically, depreciation starts middle of the month of being placed in service, regardless of actual date of being placed in service.
Thanks for the input...my question does have to do with the IRS, but it was more driven by my wife's need to be right. She agreed that although I may be technically right in the fact that the IRS considers it a rental now, it's still not up to her standards so she won't call it a rental until she would occupy it. Although small, I have to take those little victories when I can
Old 02-10-2018, 07:45 PM
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Originally Posted by Diverboy View Post
Thanks for the input...my question does have to do with the IRS, but it was more driven by my wife's need to be right. She agreed that although I may be technically right in the fact that the IRS considers it a rental now, it's still not up to her standards so she won't call it a rental until she would occupy it. Although small, I have to take those little victories when I can
It’s a rental now. Rents or no rents. If you have a fixed, established, primary residence and disclose the property SCH E, there doesn’t need to be ANY rental income on it. You would “other” expense on sch E and attach a “statement” to your return of the rehab costs if any. I see it daily when underwriting mortgages particularly with flippers. It’s an investment property. That doesn’t mean rental.
Old 02-10-2018, 08:07 PM
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Originally Posted by Diverboy View Post
Sorry, still don't understand what that has to do with when it becomes a rental. The HOA has no bearing on how/when to record things on tax forms.
Unless there are restrictions tied to the deed that limit/prohibit renting it out. In that case, it could never become ready to rent, by virtue of it being part of the HOA.
Old 02-10-2018, 08:30 PM
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Originally Posted by autobaun70 View Post
Unless there are restrictions tied to the deed that limit/prohibit renting it out. In that case, it could never become ready to rent, by virtue of it being part of the HOA.
I understand how that would apply if it were part of the question, but it wasn't. I really don't understand how/why people pull extraneous BS into a response when they clearly had no reason to respond in the first place. I never mentioned the ability to rent it out or paying condo fees.....I simply asked when does a property become a rental property from a legal or IRS perspective.
Old 02-10-2018, 08:31 PM
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I think the OP is talking about IN SERVICE date as an investment rental prop per the IRS.
It’s the day he bought it. Whether an HOA lets him rent it is immaterial
Old 02-10-2018, 08:32 PM
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Me thinks we’re on the same page lol
Old 02-11-2018, 04:15 AM
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If you bought the Condo to rent it out, it is a rental property at the end of the purchase closing. It is placed in the service the day it was in the physical condition that you would let a tenant begin living there .... I am A CPA and multi unit rental owner.
Old 02-11-2018, 05:07 AM
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Originally Posted by LongIslandFisherman View Post
If you bought the Condo to rent it out, it is a rental property at the end of the purchase closing. It is placed in the service the day it was in the physical condition that you would let a tenant begin living there .... I am A CPA and multi unit rental owner.
That is the vague part....what constitutes the physical condition that you would let a tenant begin living there? What I would live in and what I see some people living in are totally different. I wouldn't let my dog stay in some of the places I see, they are nothing more than filthy, roach infested shacks. I know a safe structure with running water and electricity are givens, but what standards are there past that? Or are there none and one just applies their own judgement?
Old 02-11-2018, 07:09 AM
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The goverment, FNMA, allows for reconciliation of a SCH E that does not accurately refect the current rental income of a property if it was purchased in the current or most recent tax year and only partially rented for the year, or, has documented lack of rent due to rehab related vacancy. Say you buy a rental in May. You spend 5 months rehabbing and rent it in October. You would claim the rental income from Oct thru Dec and claim the associated expenses allowed including rehab costs. The loan would be qualified on current leases.
—————————-

General Requirements for Documenting Rental Income
If a borrower has a history of renting the subject or another property, generally the rental income will be reported on IRS Form 1040, Schedule E of the borrower’s personal tax returns or on Rental Real Estate Income and Expenses of a Partnership or an S Corporation form (IRS Form 8825) of a business tax return. If the borrower does not have a history of renting the subject property or if, in certain cases, the tax returns do not accurately reflect the ongoing income and expenses of the property, the lender may be justified in using a fully executed current lease agreement. Examples of scenarios that justify the use of a lease agreement are
purchase transactions;
refinance transactions in which the borrower purchased the rental property during or subsequent to the last tax return filing; or
refinance transactions of a property that experienced significant rental interruptions such that income is not reported on the recent tax return (for example, major renovation to a property occurred in the prior year that affected rental income).
When the subject property will generate rental income, one of the following Fannie Mae forms must be used to support the income-earning potential of the property:
For one-unit properties: Single-Family Comparable Rent Schedule (Form 1007) (provided in conjunction with the applicable appraisal report), or
For two- to four-unit properties: Small Residential Income Property Appraisal Report (Form 1025).
Old 02-11-2018, 08:18 AM
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Ive owned 16 rental properties. When I buy a place, from the moment of settlement every expense I have fixing it up is recorded as well as the cost of going to settlement itself. Theese are all written off in the year the expenses occur. I may not rent it out for another 6 or 8 weeks as we have learned to be very picky when it comes to tenants. But my expenses start the moment I walk out of settlement and go to home depot. I have been doing it that way for 40 years and I have used the same CPA for those 40 years. I have never been audited or questioned.
Now all my leases are year round. I have my own residence and dont stay in my rental property. Where it gets complicated if you are going to use the property part of the year and rent other parts.

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