Investors & landlords

One problem with a post such as yours (and I see it a lot) is it's sometimes difficult to tell if the poster knows what they're doing, or if they're making things vague because they're afraid of looking uneducated on the issue they are asking about. I just couldn't be sure with your original post. The tact you've been renting it for years leaned me towards "they know what they're doing" while some of your terminology (such as "carrying cost") pointed the other way. It's apparent now you know what you're doing.
For one thing, I had no clue the extent of your renovations. A $300K renovation on a rental property, even in a high cost area such as California is something that I would call more than a "total gut". I'd call it a complete razing and rebuild from the ground up. Here's how I would do this.
- Amend the 2016 return and convert the property to personal use with a conversion date of the day after the last renter moved out. Make sure to print out the two 4562's when done amending too. You'll need them both. One is titled "Depreciation and Amortization Report" and the other is titled "Alternative Minimum Tax Depreciation Report". Both reports will print in landscape format.
Upon converting, the mortgage interest paid in 2016 will be split between the SCH E for the period of time it was classified as a rental, and SCH A for the period of time it was personal use. Same split for property taxes.  Then if the program doesn't do it for you (I don't think it does) you'll have to prorate the property insurance on the SCH E for the time it was a rental. (Insurance is not deductible for the period of time it was personal use)
Then only claim those expenses on the SCH E that were incurred for the period of time it was classified as a rental. (Bear with me, and you'll see)
One thing this does is stop depreciation on the date you convert to personal use. This *is* what you want. I think what you are calling "carrying costs" is mainly depreciation. so by doing this, the depreciation stops, and you *do* want it to.

Now on the 2017 return, you "will" import the SCH E data from the 2016 .tax file. First, you're going to convert it from personal use, back to rental property with a conversion date and  in service date of the first day a renter "could" have moved in. Then work it through. After entering your rental income and expenses, that will put you in the Assets/Depreciation section. You'll see the property itself listed there already. We're going to treat this "as if" the property was completely razed down to the dirt, and rebuilt from the ground up.
So basically the way we do this, is to take all prior depreciation already taken on all assets, and add it to the cost of the land. Your cost of land did not change when you converted to personal use. But now it's going to change to a higher amount, to account for all the prior year's depreciation which is what it is I believe you are including in "carrying costs".  Since land is not a depreciable asset, this is the correct way to do this.
Delete *ALL* assets listed. (I know it's scary, but you've got the printouts of the 4562's from the 2016 return.)
Now click the "Add an Asset" button.
Select Rental Real Estate Property, and continue.
Select Residential Rental Real Estate, and continue
For "Describe this ...." I suggest you enter "New Construction".
Now lets get the correct amount to enter in the "cost" box.
Start with $300K (or whatever massive amount it was that you paid for what you are calling renovations, and I am calling a rebuild from the ground up.) Now look on the 2016 form 4562 "Depreciation and Amortization Report" and add together all the amounts in the "Cost (Net of Land)" column, the "Land" column, and add that amount to your massive renovation cost. The sum is what you will enter in the "cost" box.
Now lets get the correct amount to enter in the "Cost of Land" box.
Add together all amounts in the "Land" column, all amounts in the "Prior Depr" column and all amounts in the "Current Depr" column. Enter the total in the "Cost of Land" box. You have at this point, "carried over" all of your prior year's deprecation by adding it to the value of the land.
Your purchase date will be the date you originally purchased the property. Apparently sometime in 2015.
Click Continue.
Purchased "new", then "no, I have not always used this item 100% for business", followed by "I used this item for personal purposes before I used it for business".
Date you started using it in the business will be the first day a renter "could" have moved in,
Percentage of business use is 100%. I know that doesn't seem right, but it is. Since the date you started using it for business, you've used it 100% for business, and absolutely nothing else. What you used it for prior to converting it to a rental, doesn't count for anything.
Click continue.
Basically, that does it. Now some things you can do, *Provided* you did not live in the property for one single day during the "personal use" time for any reason (2nd home, vacation, etc.) as I assume it was basically a construction site the whole time.
For your construction costs, since the builders/renovators were using your utilities that you were paying for separate from your renovation/contruction contracts, you can add the cost you paid for those utilities to your renovation/reconstruction costs and include it in the asset 'cost" box above.

Note that what this does too is to start the property deprecation again from year zero. The prior year's deprecation is accounted for because it's "carried over" to the value of the land.
Whew! Any questions?
 **He who claims to understand the situation and all aspects of it, is obviously not paying attention.**