Sole proprietor LLC and rental property prep losses - can I claim startup expenses?

Thanks for the response! Question - if we're required to start depreciating in 2024 since we technically had a "tenant," does that mean we HAVE to claim the $365 income? It almost seems like it would be better to just not claim that small amount of income and then start fresh in 2025 when we're fully operational. Would that be allowed? Also, could you explain more about the "passive activity loss limitations" you mentioned? We both have W2 jobs with combined income around $180k.

Yes, you should report the $365 income. Even though it's a small amount, all rental income is reportable. The IRS expects you to report all income regardless of amount, and that $365 establishes that your property was used for rental purposes. Regarding passive activity loss limitations, rental activities are generally considered passive regardless of how much you participate. For most taxpayers, passive losses can only offset passive income. However, there is a special provision for rental real estate activities that allows an exception. If your modified adjusted gross income is less than $100,000, you can deduct up to $25,000 of rental losses against other income. This $25,000 allowance phases out between $100,000 and $150,000 of MAGI. With your combined income at $180,000, you would likely be fully phased out of this exception, meaning your rental losses would be suspended until you either have passive income or dispose of the property.

How does this differ from just using TurboTax or H&R Block software? Those also have rental property sections. Does this specialize more in rentals or something?

Does it actually give tax advice? Or is it just like a glorified calculator? I'm always skeptical of these tax tools because they never seem to understand my specific situation.

It's much more specialized than general tax software. TurboTax and H&R Block ask basic questions but don't really explain the underlying tax concepts or give you options based on your specific rental situation. This tool actually analyzes rental-specific rules and shows you different scenarios like how changing your level of participation could affect your deductions. The biggest difference is it doesn't just calculate - it explains WHY certain rules apply to your situation. For example, it broke down exactly how the passive activity loss limitations would affect my specific income level and showed me what documentation I needed to maximize my deductions. It's like having a rental property tax specialist walking you through everything.

Wait, this actually works? I've been trying to get through to the IRS for 3 weeks about my rental property depreciation questions. How much does this service cost?

This sounds like BS honestly. The IRS wait times are because they're understaffed. How could some random service possibly get you through faster than everyone else? Sounds like a scam.

Yes, it definitely works! The way they explained it to me is they use some kind of callback technology that continuously redials and navigates the IRS phone tree until they get through, then they transfer the call to you once they have an agent on the line. It saved me from having to sit on hold for hours. As for your skepticism, I totally get it. I was hesitant too until a colleague in my real estate investment group confirmed he'd used it successfully. The service isn't bypassing any lines or doing anything shady - they're just automating the painful redial process that most of us give up on after a few attempts. When you think about the value of your time and the peace of mind from getting official IRS guidance, it's absolutely worth it.

That's really interesting, I hadn't come across Section 195 in my research. How would I "demonstrate" that I was still in startup phase? Would the fact that I only had one short-term guest who was a friend be evidence of that? And how does this interact with the depreciation requirements that seem to start once I had that first paying guest?

To demonstrate you were in startup phase, you would need to show that you were preparing to enter the rental business but not yet actively operating. Documentation is key here - keeping records of renovation work, marketing efforts in progress, business plan development, etc. The fact that you only had one friend stay for a fee that was likely below market rate could potentially support your position that this wasn't the start of regular operations. Regarding depreciation, there's an important distinction here. Section 195 applies to business startup costs (like market research, analysis, business formation costs, etc.), while depreciable assets like furniture and appliances follow different rules. Those depreciable assets would generally start being depreciated when placed in service, which would arguably be when your property was ready and available for rent - potentially when your friend stayed there. It's a complex area with some gray zones. The most conservative approach would be to start depreciation in 2024 for your assets while potentially treating certain qualifying expenses as Section 195 startup costs. This is definitely a situation where professional guidance specific to your circumstances would be valuable.

I went through an audit 3 years ago specifically about first-year rental losses. In my experience, the IRS was mainly looking at whether I had the "intent to profit" from the rental activity. They wanted documentation showing I was genuinely trying to rent it out at market rates and not just using it primarily as a personal residence with occasional rentals. They also scrutinized my depreciation start dates and whether I had properly segregated personal use vs. rental use time. As long as you have good documentation and weren't trying to claim personal expenses as rental expenses, you should be fine even with legitimate losses in the first year. Those startup costs and initial losses are normal in the rental business.

That's really helpful, thanks. I do have good documentation of all my expenses and definitely was trying to rent it out (have all my marketplace listings saved). I'm just nervous because the loss ratio is so high compared to income in that first year. Sounds like that might be normal and expected though if I can document everything properly.