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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I have a rental property which was empty for the entire 2012

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I have a rental property which was empty for the entire 2012 tax year while I've been renovating it. The renovations are not expected to be completed until early 2014.

It is one of 4 units in a building. During this time, I've had expenses like mortgage, insurance, electricity etc.

How do I handle this property on Schedule E since it was not rented at all during 2012?

Lev :

Hi and welcome to Just Answer!
Rental expenses (including depreciation) are deducted as long as the property is available for renting.
Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent.
Correspondingly - you will deduct all other rental expenses mortgage interest, insurance, utilities etc - even you do not have any rental income - so you will have rental losses which may be used to offset rental income from other units.

Lev :

When you retire it from service - you stop depreciating property and all expenses related to the renovation should be capitalized.
Thus - there is no strict guidelines - but I assumed if the renovation takes longer than a year - and the property is not available for renting during that period - then all expenses related to that property are capitalized (added to the basis) - including mentioned expenses - mortgage interest, insurance, utilities etc.

Customer:

Since there are no strict guidelines, could I just as well take the annual expenses and not amortize them?

Lev :

Yes - that is possible. The IRS specifically mentioned in the publication 527 that you continue to depreciate the rental property if it is temporarily idle - that means - you are treating the property as a rental property - and rental expenses are deductible as if the property is rented. However you still need to capitalize renovation expenses.

Lev :

The main point here is that the property was a rental property and will be a rental property after renovation; and that is temporary not rented.

Customer:

Thank you.

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