The capital improvements to the property are added to the cost basis of the property, the furnishings can be depreciated, the question you need to answer is was the rehabbing a capital improvement or ordinary repairs. If they were repairs they can be deducted as an expense against income. This information will be reported on Schedule E.
A capital improvement will either enhance the property's overall value, prolongs its useful life, or adapt it to new uses. If it does not meet the criteria for being a capital improvement, then it would be considered a repair.
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