@Anonymous_ wrote:
Refer to the following section of the relevant IRS publication in order to make the distinction between an improvement and a repair. Note that an addition would almost certainly be considered an improvement that must be capitalized.
https://www.irs.gov/publications/p527#en_US_2019_publink1000219015
With respect to losses from rental real estate activities. to the extent losses exceed income from other passive activities, the loss is disallowed.
However, there are exceptions for real estate professionals who materially participate in their rental activities and there is also a $25,000 special (loss) allowance (subject to limitations) if you or your spouse actively participated in the rental activity.
See https://www.irs.gov/publications/p527#en_US_2019_publink1000219124
Additionally, you may be able to "capitalize" your losses. That is, to treat your repair expenses as if they were capital expenses subject to depreciation. Why would you do this? For example:
Suppose that for your 2019 return, you spent $13,000 for capital improvements and $15,000 for repairs, against $2100 of income. And suppose you don't qualify for the special loss deduction. You would depreciate the capital improvement over 27.5 years, meaning you deduct $472 in 2019.*** You deduct the $15,000 repair expense, for total deduction of $15,472. But your deduction is limited to $2100, so you lose the remaining deduction forever.
So instead, you elect to treat the $15,000 of repair expense as a capital expense. This requires including a written explanation with your 2019 tax return so you can't e-file. You now have $28,000 of capital improvements that you deduct over 27.5 years, meaning you deduct $1018 this year. The deduction is allowed since it is less than your income. It is better in the long run to deduct the repairs over 27 years than not deduct them at all.
A similar thing could be done to capitalize any of the $35,000 of expenses from 2020, and deduct the expenses over 27 years, depending on how much rental income you actually obtain in 2020 once the property is back on the market.
Note that this only applies if you re-rent the property. If you convert it to personal use or sell it, you can't do that.
And, even if you qualify for the special $25,000 loss, you may want to capitalize the remainder of your repair expenses so you eventually benefit from them.
I suggest the services of a qualified accountant to help you navigate this issue.
