Here is what chatgbt says, and now I understand. Thanks everyone for your patient and feedback:
The IRS distinguishes between business expenses and capital expenses, and the way you deduct them depends on how you're treating this rental activity.
1. Business vs. Investment Activity
If you are in the business of regularly renovating and renting properties (i.e., you're operating as a real estate professional with a trade or business), then general expenses related to your rental activities (e.g., gas, tolls, meals) may be deductible as business expenses under Schedule C (Profit or Loss from Business).
However, if this is your first rental property and you are not yet operating an established business, the IRS may consider it an investment activity rather than a business, meaning deductions would generally be reported under Schedule E (Supplemental Income and Loss) instead.
2. Expenses Before the Rental Begins
Expenses incurred before the property is available for rent (e.g., travel for renovations, meals, etc.) are typically considered start-up expenses rather than immediately deductible business expenses.
Start-up expenses (up to $5,000) can be deducted in the year the business starts, with any remaining amount amortized over 15 years.
3. Deductible vs. Capitalized Expenses
Deductible Expenses (Generally for an Active Rental Property)
Gas, tolls, mileage (for business use of your vehicle)
Advertising for tenants
Utilities (if paid while looking for tenants)
Insurance
Maintenance and repairs (not improvements)
Property management fees
Capital Expenses (Must Be Depreciated)
Major renovations or improvements (e.g., new roof, HVAC, structural upgrades)
Property purchase costs
Major appliances or fixtures
4. What About Meals?
Business meals are only deductible (at 50%) if they are directly related to your real estate business, such as meeting with a contractor or property manager to discuss renovations. If you're simply eating while working on the property, those costs are considered personal and not deductible.
5. Timing: When Can You Deduct?
If your property is not yet rented but actively listed for rent, certain expenses related to securing a tenant (like advertising and travel for showings) may be deductible.
If you are still in the renovation phase and the property is not yet available for rent, expenses related to improvements should be capitalized.
