Writing off Leasehold Improvements

Forum|Forum|4 years ago
March 17, 2022
4 replies
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I asked this question and got an answer saying that I CANNOT write it off since I do not own the house and another answer saying that the first answer is WRONG. I'm more confused than ever. Here's the question:

I rented a home from someone 2 years ago and rented it out on Airbnb. I spent money putting in a new kitchen and driveway and have not fully captured the depreciation on the renovations. I returned the home to the owner in 2021 and walked away from the business. I would like to capture the rest of my depreciation. Would I dispose of this asset as a sale with a value of $0?

ColeenD3

You can't take depreciation for property you do not own.

From Tax Topic 704 from the IRS.

You may depreciate property that meets all the following requirements:

It must be property you own.

Depreciation

pbmunkeyAuthor

Just making sure we’re on the same page:

number 1 says it must be property that I own. Though I don’t own the house, the kitchen renovation and driveway was paid for by me. The cabinets and countertops can be removed if need be but I chose to leave it in the house when I returned the home to the owner.

is it still not depreciable? If not, what other options do I have to in order to write off this expenditure?

JillS56

That is correct, if you do not own the property you cannot write off any of the expenditures. There are no other options for you to write off these expenditures.

AmeliesUncle

While you don't own the original building and land, you DO own the improvements that you made.

I'll point you to the actual law itself - Regulation §1.167(a)-4:

§ 1.167(a)-4 Leased property.

(a) In general. Capital expenditures made by either a lessee or lessor for the erection of a building or for other permanent improvements on leased property are recovered by the lessee or lessor under the provisions of the Internal Revenue Code (Code) applicable to the cost recovery of the building or improvements, if subject to depreciation or amortization, without regard to the period of the lease. For example, if the building or improvement is property to which section 168 applies, the lessee or lessor determines the depreciation deduction for the building or improvement under section 168.

https://www.law.cornell.edu/cfr/text/26/1.167(a)-4

DianeW777

The qualified leasehold improvements apply only to nonresidential real property according to the IRS. If you reported this as business income as indicated below, there may be a possibility but continue to review your specific situation.

IRS Publication 956 (page 30) Printed below for your convenience.
- Qualified improvement property. Generally, this is any improvement to an interior part of a building that is nonresidential real property, and the improvement is section 1250 property, is made by you, and is placed in service by you after 2017 and after the date the building was first placed in service by any person.
  - However, a qualified improvement does not include any improvement for which the expenditure is attributable to any of the following.
    - • The enlargement of the building.
    - • Any elevator or escalator.
    - • The internal structural framework of the building.

It's unclear how you treated your Airbnb income but here are some key components. Most people who use Airbnb are running a business and by default are required to file under Schedule C if there is "substantial services".

If you’re providing hotel-like perks such as regular cleaning or maid service (in excess of 10% of the rental cost), fresh linens or towels, in-room coffee, transportation, or sight-seeing, you’re providing substantial services, and that means you'd file Schedule C.

If you provide substantial services that are primarily for your tenant's convenience, report your income and expenses on Schedule C. If this is the case, then you use the nonresidential real estate like a hotel and/or bed-and-breakfast. This will be the 39 year recovery.
- Should I Report My Rental on Schedule E or Schedule C
- Where do I enter Schedule C?

If you did report the income as rental on Schedule E, then there is nothing you can use for depreciation that you did not own as indicated by our awesome tax experts @ColeenD3, @JillS56 and @DaveF1006.

Please update if you need further clarification.

@pbmunkey

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AmeliesUncle

@DianeW777 wrote:
If you did report the income as rental on Schedule E, then there is nothing you can use for depreciation that you did not own as indicated by our awesome tax experts @ColeenD3, @JillS56 and @DaveF1006.

Did you not read the law that I posted?

Perhaps it would be clearer if the OP asked "can I depreciate capital improvements I made to the property I rented from somebody". But just because the improvements don't qualify under the category of "Qualified Improvement Property" (or the former "Leasehold Improvement Property") does NOT mean the capital improvements can't be depreciated. They are just depreciated under the 'normal' categories for real estate.

DaveF1006

I do see where AmeliesUncle has posted an IRS - Regulation §1.167(a)-4 where you could depreciate these assets. To claim, you will need to report the Airbnb like it was a business.

Go to federal>income and expenses>
Self-Employment>Self-employment income and expenses
Complete the profile that asks about your business
Then there will be a screen where you will enter your self-employment income.
After entering, you will start entering expenses into your program.
If using Turbo Tax online, there is an asset section in the expense category. This is where you can enter your improvements as depreciable assets.
if using the Turbo Tax Home and Business Software, There is a separate Business Asset section where you will enter this information.
Interviews from both products will reference improvements made, which will lead through the sections.