We relocated to another state.
Our plan was to rent out our home in the former State. But because it needed repair/remodeling we could not rent it out immediately. The remodeling/repairs will take a while.
Is there any IRS law/regulation that states that
1. we cannot deduct expenses as an investment property because we haven't rented it out?
2. Does the IRS have any time limit that it has to be rented out to qualify as an investment property?
You didn't ask this question, but another option would be to sell your former residence
and purchase a separate rental property in that area. Some potential benefits:
* You can take advantage of the home-owner exemption on capital gains on your former
residence. This would not in general be available for rental property, although if you
sold soon enough after leaving you could still get it.
* It cleanly separates the personal residence from the rental/investment property, so it
would simplify things like assigning basis and the question of when this became rental
Of course, you could have other non-tax or non-financial reasons for wanting to keep
the old property.
Well, if nobody's going to respond, I guess I will. I deal with a
lot of tax issues, but I'm not a CPA or EA, and that's who would be
better for this. So if I get something wrong, I'm sure someone will
come along and let us know.
First you have to distinguish between repairs and capital
improvements. If you convert the house to a rental (even if you
haven't actually rented it out yet), then repairs will be deductible.
Capital improvements aren't immediately deductible, but get added to
the basis. So you get to depreciate them with the house, or get
credit for them for tax purposes when you sell the house.
As for a specific time period, I'm not aware of one. Converting from
your residence to a rental is more a matter of intent than anything
else. What you do will determine your intent. Here is what the IRS
has to say (among other things) in Publication 527:
"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 isn’t available for
As long as you intend to use it for rental purposes, and the work you
do on the house is toward that purpose, then it should be able to be
treated as a rental right away.
My understanding varies slightly, the situation also being a bit
different. I bought a 3 family house, which was a fixer upper. All the
costs were added to the basis, as the property was not "placed in
service" yet. That term was satisfied once the property was listed with
an agent to rent.
In the case above, I don't believe the repairs are deductible at all. An
outright upgrade, say, a new roof, would get added to the basis. Repair
made once the unit is actually rented are a deduction, but before that,
the owned should have maintained their own home.
Elsewhere, I recall seeing that things like having the house painted are
not a deduction in either case, not if done before a sale, nor before
it's placed into service as a rental.
might help prove one of us
correct. Page 16 offers a scenario of placing a former home into use as
a rental, and suggests "Miscellaneous repairs (after renting) $297"
which implies to me the before renting can't be deducted.
According to IRS Publication 946, you were right and I was wrong. It
says (among other things,
"You place property in service when it is ready and available for a
specific use, whether in a business activity, an income-producing
activity, a tax-exempt activity, or a personal activity. Even if you
are not using the property, it is in service when it is ready and
available for its specific use.: