 Income tax 2022-2023, residential rental property, rental income, and expenses if no personal use of dwelling. Part number two, let's do some wealth preservation with some tax preparation. Most of this information comes from publication 527 residential rental property including rental of Vacation Homes Tax Year 2022. You can find on the IRS website, irs.gov, irs.gov, looking at the income tax formula. We're focused online. One income remember and the first half of the income tax formula is in essence an income statement. However, it's just an outline. Other forms and schedules flow into these line items like the Schedule E, which in essence is an income statement in and of itself having rental income minus rental expenses, the net rental income in essence, rolling into line one income of our income tax formula. So in a prior presentation, we started talking about the situation, which is the easiest, most straightforward situation, least convoluted situation where we have rental property that doesn't have personal use related. Accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it to it. So we simply have the rental property. It's just rental property as opposed to a home that we're renting partially or a part of it or rental property that we use partially for a vacation or personal use situation. We want to think about that situation, which is most clean cut where we simply have property that is just rental property. And then once we have those concepts down, we can take those concepts, which will generally apply to the more convoluted situations where we have those mixes between personal and business and then try to think about the differences where we have to parse out the business versus personal kind of stuff. All right. So we're continuing on types of expenses. So listed below are the most common rental expenses, noting that with the rental expenses, it's kind of like the schedule C situation with business income. They usually make sense, right? Rental expenses are typically those ordinary and necessary type expenses you needed in order to generate the revenue so that we're taxed on net income as opposed to the gross income. And of course, the expenses will be those that are going to be common to owning rental property typically. So advertising common expense for just about any type of business, auto and travel expenses. Those get a little bit confusing because we're going to use a mileage method or a direct method and we depreciate the autos and stuff. But the use of the auto like a business normal business, you would expect to be an ordinary and necessary expense, cleaning and maintenance clearly could be a component. Commissions, we have depreciation. It's a big one because the rental property in and of itself is a huge cost and depreciating that cost becomes important. Insurance, common business type of expense, interest. So obviously there could be a loan and this time the loan of course was necessary for the financing to get the capital in order to have the rental property. So the interest on that loan would be business related as opposed to interest on say a personal car or something like that, where the interest would be personal in nature, legal and other professional fees, common business expense, local transportation expenses, management fees, which is something more common to the rental sector because you might have management fees that you're going to be paying as a common kind of practice within the industry. Mortgage interest paid to banks. So now we've got the interest specifically for the loan that was taken out for the possibly the rental property, of course, right, whereas possibly interest, other interests might be for other loans other than the direct mortgage itself, but applied to the rental property. Points, which kind of coincides with the interest. It's kind of a messy situation. We might dive into a little bit more detail. Shortly, our rental payments and repairs clearly taxes and utilities quite common. All right, depreciation depreciation is a capital expense. It is the mechanism for recovering your cost in an income producing property and must be taking over the expected life of the property. The general idea with depreciation. You can see it for like equipment, which is kind of more straightforward in some ways, because if you buy a piece of equipment, the idea would be, can I expense it this year? And oftentimes it's going to say, no, it's too, it's too big of an item. We need you, even though you're on a cash based system to do it and a cruel type thing, put it on the books as an asset, meaning it's not on the tax return generally, because we don't have the assets. We don't have a balance sheet on the tax return, although we might have a depreciation schedule on the tax return, and then we depreciate it over its useful life, which means that's where we see it on, you know, the schedule E when we're allocating the cost over the useful life. And then they might throw in some other kind of concepts with a depreciation like 179 deductions and special depreciation and so on with the rental property, obviously the property in and of itself becomes a huge cost. And then being able to allocate that cost over some period of time becomes quite important. The rental property itself is a little bit more confusing than other type of rental, other type of assets, because when you buy real estate, then the real estate itself might go up in value, whereas most things go down in value because they deteriorate. If you buy a forklift, you buy a car, buy a truck, those things go down in value. So depreciating the cost makes sense from that perspective as well, because we're going to lower the value of the asset and expense it over time. The same concept would apply to the building of a rental property because it will have wear and tear over time. However, many other factors could increase the value of the building just in terms of location and what not location, location, location, right? So the value of the building might actually go up in terms of fair market value even as you're depreciating it, allocating the cost over the life. All right, you can begin the depreciation rental property when it is ready and available for rent, see placed in service under when does depreciation begin and end in chapter two. Insurance premiums paid in advance. So if you pay an insurance premium for more than one year in advance, you can't deduct the total premium in the year you pay it. So here we come with this accrual versus cashed based thing again, oftentimes rental properties on a cashed based system. And if you pay in advanced for things like insurance, which is the common thing to have an advanced payment for, then you might, the IRS is skeptical that you're taking advantage of a cashed based system by taking more expense up front by expending the cash in a prepayment. So then you have to do it like an accrual kind of thing because the IRS doesn't want you to do that. So for each year of coverage, you can deduct only the part of the premium payment that applies to that year. That's an accrual kind of concept. See chapter six of publication 535 for information on deductible premiums. Interest expense. You can deduct mortgage interest you pay on your rental property. When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally can't be deducted as a rental expense. Chapter four of publication 535 explains mortgage interest in detail. So the general idea with interest would be if it was on a personal loan, like you got your own interest on a car, that's your personal car, not the business car, then you would think that you wouldn't be able to deduct it because it's personal. But if you needed to finance, you took out a loan, most likely a loan to purchase the home or purchase the rental property. And if it's just rental property, you're using the property just for rental use, then you would think that you needed to rent the money, meaning get the capital, take out the loan in order to get the property. So it's an ordinary necessary expense and the rent on the loans is interest. So it's the general idea, but it can get a little bit messy with regards to the interest. And then when you get into points, what's interest versus other things. And then if you had a personal and business use of property, then, then it gets messy in terms of the loan parsing out between personal and business again, expenses paid to to an obtain a mortgage. So certain expenses you pay to obtain a mortgage mortgage on your rental property can't be deducted as interest. These expenses, which include a mortgage commission, abstract fees and recording fees are capital expenses that are part of your basis in the property. Now this is something that it seems like, well, what's the difference, but it can have a big impact because what we want to be able to do is record things so that we can get the expense as soon as possible. So what I'd like to do is say, Hey, look, can't I record this like as an expense right now as like interest, I'm paying now or something so I could take the expense now because if I have to record it as part of the purchase of the property, then I'm going to have to put it on the books as an asset and I have to depreciate it over a very long time frame, which is a lot worse than getting the expense. So the general rule is that I would like to whenever possible that get the expense sooner rather than later. So form 1098 mortgage interest statement. So if you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a form 1098 or similar statement showing the interest you paid for the year. So you're probably familiar with that form with regards to mortgage interest for a home, your personal residence. Obviously you get a similar form, similar idea, similar concept here, but it wouldn't be deducted on like a schedule A. If it was the rental property, it would be showing you the interest that was paid for the business property. So if you and at least one other person other than your spouse, if you file a joint return, reliable for and paid interest on the mortgage and the other person receive form 1098 report your share of interest on schedule E form 1040 line 13. So attach a statement to your return showing the name and address of the other person on the dotted line when when to line 13 enter C attached. So normally you're going to get that 1098. The IRS also gets the 1098 if the 1098 didn't go to you but went to someone else, but you are responsible for part of the interest. Now it gets a little confusing on the IRS side of things because they would expect to be seeing the 1098. So you have to tell them this is my portion of the mortgage interest and the 1098 got reported to this other person for whatever reason. Schedule and other professional fees. You can deduct as rental expense legal and other professional expenses such as tax return preparation fees you paid to prepare schedule E part one. So when you have tax return preparation, you can allocate part of the fee because part of the fee was for the business use or the schedule either rental property. For example, on your 2022 schedule E, you can deduct fees paid in 2022 to prepare part one of your 2021 schedule E. So you can also deduct as rental expense any expense other than federal taxes and penalties you paid to resolve a tax underpayment related to your rental activities. Local benefit taxes. In most cases you can't deduct charges for local benefits that increase the value of your property such as charges for putting in streets sidewalks or water and sewer systems. These charges are non depreciable capital expenditures and must be added to the basis of your property. So we have a similar situation we saw before from our perspective and the taxpayer side. We would like to say, hey, look, I would like to expense these now rather than having to add them as part of the property so that I can get the benefit from a tax perspective today as opposed to depreciating them over a very long time frame. So those those common scenario often comes up and from our perspective, the question is always is I would like to get the benefits sooner rather than later. Can I expense it now rather than capitalizing it? And the tax code is often saying we want you to include that as the capital assets so that you get the expense, but you don't get it until you depreciate it. So you get this longer, big, long time frame and the expense benefiting over time. OK, however, you can deduct local benefit taxes that are for maintaining, repairing or paying interest charges for the benefits, local transportation expenses. So you may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve or maintain your rental. It's a rental property. So now you're moving around to collect your income. That's going to be part of, you know, the business system. So you would think those would be deductible. However, transportation expenses incurred to travel between your home and a rental property generally constitute non deductible commuting costs unless you use your home as your principal place of business. So now we've got this situation and this is kind of they're trying to kind of mirror what you might see on like a business side of things. So if you had a W2 like employee, they don't get to deduct the commute that they have to go to work. So you would think that a Schedule C business or a Schedule E business rental property also wouldn't get to deduct like the normal commuting costs. I think is the general concept here. But what if your your your home office is your principal place of business? Well, now you would think that the movement from your principal place of business to some other place could be non commuting and therefore deductible. And then you get into the questions of what does it mean to be your principal place of business and so on and so forth. And you could see publication 587 business use of your home for information on determining if your home office qualifies as a principal place of business. So generally, if you use your personal car pickup truck or light van for rental activities, you can deduct the expenses using one of two methods. We got the actual expenses or the standard mileage rate. So that's the common issue with the automobiles. When you're doing your bookkeeping, you're going to be having expenses come up gasoline maintenance and so on recording that. But when you're then recording it for taxes, the question is, do you want to have the actual use the actual method or a standard mileage methods similar kind of concept that we see on a normal kind of schedule C type of business. The standard mileage method is usually kind of easier to calculate. And so then you can try to think about those two methods in which would be most beneficial. Oftentimes in the first year of operation, the direct method might be more beneficial, especially if you're allowed to use accelerated depreciation methods. But then you might be limited from going from the direct method and then switching to the standard mileage method. So you kind of have to think about it in terms of what do you think the benefit will be over the life of the use of the vehicle as opposed to in one particular year. So in any case, for 2022, the standard mileage rate for business use is 58.5 cents per mile from January 1st, 2022 to June 30, 2022, from July 1st, 2022 to December 31st, 2022. The standard mileage rate for business use is 62.5 cents per mile. So now you've got two rates for the year because they increase it like in the middle of the year. So for more information, see chapter four of publication 463. We got pre-rental expenses. You can deduct your ordinary and necessary expenses for managing, conserving and maintaining rental property from the time you make it available for rent. So now we have a question of, well, what if I'm just holding on to the property and it's not actually being rented at this point in time? But obviously I have to maintain it because I have an intent to rent it. Now, this gets a little bit messy because oftentimes with rental property, people sometimes hold on to the property primarily, there might have a primarily purpose of the property going up in value and getting value increase and possibly a capital gain when they sell the property as opposed to trying the principal purpose being rental income. So then you have to get into the question of, well, were you actually intending to rent out the property or are you just trying to write off expenses of like investment property or something like that, right? But you would think that if your intention is to rent it, then obviously the payments that you're incurring to maintain the property that's going to be rental property, even though someone is not in it at the particular moment would be deductible. If no one gets in it and in some time you might have losses on that property and losses are what the IRS is going to be skeptical of with this passive rental property, you know, stuff. All right, rental of equipment. So you can deduct rent, you pay for equipment that you use for rental purposes. However, in some cases, lease contracts are actually purchase contracts. If so, you can't deduct these payments. So if you're renting equipment, you can deduct the payments of the equipment that you're renting, but sometimes for different reasons, they structure something to look like a lease, but it's actually a purchase in reality because you're going to, in essence, pay the full purchase price by the end of the, where you're going to have a, you're going to purchase it by the end or something like that, in which case inform it's a lease, but in actuality, it's a purchase. So you can recover the cost of purchase equipment through depreciation. So if it's a purchase, you've got to depreciate it. If it's a lease, you expense the lease payments when they come up. So rental of property, you can deduct the rent, you pay for property that you use for rental purposes. If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. So travel expenses. You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of this trip is to collect rental income or to manage, conserve, or maintain your rental property. So similar kind of concept that we had with the Schedule C type of business. Normal traveling is within the local community. If it's overnight, then it's going to be in the category of travel as opposed to just auto possibly. So you must properly allocate your expenses between rental and non-rental activities. You can't deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. The cost of improvements is recovered by taking depreciation. So we have that same concept again. If you're trying to improve the property, then the cost you can, from our perspective, we would like to expense it. But the IRS is saying, well no, that's part of the cost of your improvements, which you would have to put on the books as an asset and not get the benefit of the expense until you depreciate it. So for information on travel expenses, you can see Chapter 1 of Publication 463 on the IRS website. Uncollected rent. So if you are a cash-based taxpayer, don't deduct uncollected rent because you haven't included it in your income. It's not deductible. So if you use an accrual method, report income when you earn it. So if you are unable to collect the rent, you may be able to deduct it as business bad debt. In other words, if you have your system on a cash-based system and someone just doesn't pay you the rent, well you're not going to be able to deduct bad debt expense if you're on a cash-based system because you never recorded the income. You just never would have recorded the income. But if you are on a cruel system, you would have recorded the income in the month that they used it. You would have invoiced them, you would have been tracking the accounts receivable, and if you determined they're not going to pay you, then you would expect you would get a bad debt expense, a deduction, because you had full, you had recorded it in income in the past and you're never going to get the money. So then you would get a deduction. So c chapter 10 of publication 535 for more information about business bad debts, vacant rental property. If you hold property for rental purposes, you may be able to deduct your ordinary necessary expenses including depreciation for managing, conserving, and maintaining the property while the property is vacant. However, you can't deduct any loss of rental income for the period the property is vacant. So there is our situation with the properties not being used. You would think that if your intent is to use it for rental property, you would still get the deductions, but the iris is skeptical of the losses because if you get losses, then you might be able to deduct them against other income and that's where the iris is skeptical of this whole situation. So vacant while listed for sale, if you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. If the property isn't held out and available for rent while listed for sale, the expenses aren't deductible rental expenses. Points. So the term points is often used to describe some of the charges paid or treated as paid by a borrower to take out a loan or a mortgage. So now when we have rental property, if we're purchasing the rental property, we take a loan out to finance the purchase of the rental property. We're going to have to pay interest on the loans and then sometimes you have these weird things where they structure points and points could be different things. They could be payments for part of the borrowing process or they could be like prepayments of interest or something like that in which case the question is how are we going to treat those? Do we have do we get to deduct them in the current period? Do we get to call them interest? Do we have to put them on the books and amortize them over the cost of the property which is a very long time frame or possibly over the life of the loan as points which might be a little bit less than the life of the property. So these charges are also called loan organization fees, maximum loan charges or premium charges. Any of these charges points that are solely for the use of money are interest because points are prepaid interest you generally can't deduct the full amount in the year paid but must deduct the interest over the term of the loan. So the general idea is that well you're prepaying the interest so the the governments can say well they are interest but you prepaid them so we're going to have to you're going to have to put them on the books as an asset. Not depreciate them necessarily not depreciate them as a capital asset part of the property they're not included as part of the cost of the building in other words and depreciated over the life of the building but rather over the life of the loan. Now the loan could also be quite long in length you might have a 30-year loan in which case you're going to be you won't get the benefit of the points for a long time but sometimes the loan isn't that long you might only have a 15 or 10-year loan so it would be better at least to put the points on the books as part of a loan you'd rather have to expense them today if you can't do that I would rather expense them for a shorter life asset such as a loan which might be 10 or 15 years as opposed to basically the the depreciation as part of the actual building which might be depreciated over you know a longer point in time is the general thought process. So the method used to figure the amount of points you can deduct each year follows the original issue discount OID rules in this case points are equivalent to OID which is the difference between stated redemption price at maturity generally the stated principal amount or amount borrowed over the issue price generally the proceeds. So then there becomes an issue on how we can deduct the points you know that when you think about well what can I do can I just take the points divided by the number of years and deduct it on a straight line basis that would be the easiest thing but not exactly the most proper thing it would be more proper to be using this method. Okay so if the difference is equal to or less than zero the amount of OID is zero the first step is to determine whether your total OID which you have on bonds or other investment in addition to the mortgage loan including the OID resulting from the points is insignificant or de minimis is it a small amount in comparison and therefore not worth the trouble in essence. If the OID isn't de minimis you must use the the constant yield method to figure how much you can deduct which is a more precise method than like a straight line method. De minimis OID the OID is de minimis if it is less than one fourth of 1.0025 of the stated redemption price at maturity principal amount of the loan multiplied by the number of full years from the date of original issue to maturity term of the loan so if the OID is de minimis you can choose one of the following ways to figure the amount of points you can deduct each year so on a constant yield basis over the term of the loan or on a straight line basis over the term of the loan the straight line basis is probably the is clearly the easier method so in proportion to stated interest payments and so then you can that's another way that you can do it try to tie it to the you know proportion without to the interest payments so in its entirety at maturity of the loan which is probably the worst way that you but if it's insignificant it won't really matter but you'd rather be deduction sooner rather than later so so you make this choice by deducting the OID points in a manner consistent with the method chosen on your timely file tax return for the tax year in which the loan is issued. All right example Carol took out a $100,000 mortgage loan on January 1st 2022 to buy a house she will use as rental during 2022 the loan is to be repaid over 30 years so that's a long loan so during 2022 I mean it's a standard loan but it's also quite long I mean that's about similar to the life that if you had to capitalize it as an asset in terms of the cost of the property right so in any case during 2022 Carol paid $10,000 of mortgage interest stated interest to the lender when the loan was made she paid $1,500 in points to the lender the points reduced the principal amount of the loan from $100,000 to $98,500 resulting in $1,500 OID so Carol determined that the points OID she paid are de minimis based on the following computation so there's a small amount of points based on the computation which means she has the flexibility to do more what she wants with with how she's going to allocate the points like a straight line method the easy thing to do so redemption price that maturity principal amount of the loan is $100,000 multiplied by the term of the loan in complete years 30 and multiplied by 0.0025 de minimis amount is $7,500 so she's good the points OID she paid $1,500 are less than the de minimis amount $7,500 so therefore Carol has de minimis OID and she can choose one of the following four ways discussed earlier to figure the amount she can deduct each year so she chooses the straight line method because she's not because that's easy under under the straight line method she can deduct $50 each year for 30 years so in practice that means you put it on the books as you know on the same depreciation kind of schedules but not as part of the building itself but rather as the points that you're going to allocate not over the the useful life of the building but rather over its own life straight line allocation of 30 years in this case because that's the years of the loan all right constant yield method if the OID isn't de minimis you must use the constant yield method to figure how much you can deduct each year oh no please no so you figure your deduction for the first year in the following manner okay so number one determine the issue price of the loan if you paid points on the loan the issue price is generally the difference between the principal and the points two multiply the result in one by the yield to maturity defined later three subtract any qualified stated interest payments defined later from the result in two this is the OID you can deduct in the first year so yield to maturity ytm this rate is generally shown in the literature literature you receive from your lender so if you if you don't have this information consult your lender or tax advisor in general the ytm yield to maturity is the discount rate that when used in computing the present value of all principal and interest payments produces an amount equal to the principal amount of the loan so qualified stated interest qsi in general this is the stated interest that is unconditionally payable in cash or property other than another loan of the issuer at least annually over the term of the loan at a fixed rate so example year one the facts are the same as in the previous example the yield to maturity on carol's loan is 10.2467 compounded annually she figured the amount of OID she could deduct in 2022 as follows principal 100 000 minus the points issue price of the loan 98 500 multiplied by the ytm yield to maturity which was that 10. or 0.102467 or 10.24 whatever total 10,093 minus the qsi the 10,000 and that gives us the points the OID deductible in 2022 to figure your deduction in any subsequent year you start with the with the adjusted issue price to get the adjusted issue price add to the issue price figured in year one any OID previously deducted then follow steps two and three earlier all right example year two carol figured the deduction for 2023 as follows you've got the issue price 98 500 plus points OID deducted that's the 93 the adjusted issue price is now 98 593 multiplied by the yield to maturity 0.102467 total 10,103 minus the qsi 10,000 gives us the points OID deductible in 2023 so you can see the the interest is not you know deducted the same over the life and you can this is similar to you can see why this would kind of be the case because if you look at your normal amortization schedule you note that when you when you're paying for uh for your monthly payments for example that uh there's a there's an allocation between interest and principal and the difference between interest and principal changes over the life of the loan so when you have this advanced payment that we're considering to be interest you have a similar kind of thing so to properly record it you would have to figure out you know closer to the proper interest amount which wouldn't simply be a straight line or the same each year okay loan or mortgage ends if your loan or mortgage ends you may be able to deduct any remaining points OID in the tax year in which the loan or mortgage ends so now you have a situation you've been you put these points on the books and you have to deduct them over the life of the loan 30 years but then the loan ends early well then if the loan ends early you would think that you would get to deduct the points at that time uh because it wouldn't make sense to keep on allocating the points when you no longer have the loan because the points were related to a prepayment on the loan that has now ended so a loan or mortgage may end due to refinancing prepayment for closure or similar event however if the refinancing is with the same lender the remaining points OID generally aren't deductible in the year in which the refinancing occurs but may be deductible over the term of the new mortgage loan so now you're going to say well I got to refinance I re-upped the loan with the same lender well so now you would think okay well then then the points should keep on writing you would think possibly to the to the terms of the new refinanced loan would be a logical uh kind of thought process then so points when loan refinance is more than the previous outstanding balance when you refinance a rental property for more than the previous outstanding balance the portion of the points allocable to loan proceeds not related to rental use generally can't be deducted as rental expense example Charles refinanced a loan with a balance of 100,000 the amount of the new loan was 120,000 higher than the original Charles used the additional 20,000 to purchase a car so he didn't put it into the rental properties for personal use now the points allocable to the 20,000 would be treated as non-deductible personal interest this kind of stuff can come up of course because oftentimes when you're getting a loan the bank wants collateral even if you're getting a personal loan so you end up with these loans where the where where you have business property possibly used to finance a loan that's then going to be used for personal stuff and then you get kind of a messy situation with regards to the deductible interest with with relation to the loan and you have to determine what was the loan proceeds for even though the the the business property was used as collateral our repairs and improvements generally an expense for repairing and maintaining your rental property may be deducted if you aren't required to capitalize the expense so the confusing thing here is often comes up is like well is the repair an improvement or repair we would rather have it be a repair typically because once again from our perspective from a tax perspective as the rent as the person who's renting here tax payer we want the expense as soon as possible so if there's a problem if there's a a leak in the roof we would like to be able to deduct the repair of the roof but if we repaired the whole roof then the question is well now i might have to i might have to put it on the books as an improvement which isn't good for us because then we would have to allocate the cost over the life of the improvement as opposed to getting the deduction in the current year so improvements you must capitalize any expense you pay to improve your your rental property meaning you don't expense it in the point in time you paid it you got to capitalize it which isn't as good because we still get the deduction but we don't get it until we depreciate it so and expenses for an improvement if the results in a is a betterment to the property so if it's improving the property then it's an improvement there's a lot of gray area that people get into with whether or not it's an expense repair or improvement so so it's so it betterment to the property restores your property or adopts your property to a new or different use table one one shows examples of many improvements all right betterments what does that mean expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition enlarging or expanding your property or increasing the capacity strength or quality of your of your property restoration so expenses that may be for restoration include expenses for replacing a substantial structural part of your property repairing damage to your property after you properly adjusted the basis of the property as a result of a casualty loss or rebuilding your property to a like new condition adaptation so expenses that may be for adaptation and include expenses for altering your property to a use that isn't consistent with the intended ordinary use of your property when you began renting the property so again these are the definitions of those things where you would think we're moving away from normal repairs to something that has to go on the books as an improvement we bettered the property we restored the property we adopted the property we changed it significantly in that in that case to what it was originally attended for okay example of improvements some common examples additions you put in a bedroom a bathroom a deck garage porch patio these aren't improvements these aren't things you can just expense in the year they happen you typically have to put them on the books uh as as improvements lawn and gardening landscaping driveway walkway fence retaining wall sprinkling system swimming pool typically things you can't just expense but have to put on the books as an asset and depreciate miscellaneous storm window doors a new roof so there's the roof example central vacuum wiring upgrades satellite dish security system heating and air conditioning heating system central air conditioning furnace now these often get kind of messy if you're like building a home and you get into questions like well does that have to be included as part of the home itself and depreciated over the life of the property or maybe could i could i call heating system like equipment and depreciated over a smaller useful life in other words once i have to put it on the books as a capital asset the question is what's the useful life of the capital asset i would rather have a smaller term than a longer term i would rather be able to expense it over depreciated over seven years than over 30 years right so you get in those kind of issues central air conditioning furnace ductwork central humidifier filtration system plumbing you got the septic system water heater soft water system filtration system interior improvements built in appliances kitchen modernization flooring wall-to-wall carpeting insulation attic walls floor pipes ductwork and so on so de minimis safe harbor for tangible property if you elect this de minimis safe harbor for your rental activity for the tax year you aren't required to capitalize the de minimis costs of acquiring or producing certain real and tangible personal property and may deduct these expenses as rental expenses online 19 of schedule e so de minimis means they're generally fairly small in proportion and therefore allowed to be deductible under the safe harbor rule so for more information on electing and using the de minimis safe harbor for tangible property you can see chapter one publication 535 safe harbor for routine maintenance if you determine that your costs for an improvement to a building or or equipment you may still be able to deduct your cost under the routine maintenance safe harbor so for more information there you can see publication 535