What do I do with all of the expense? It depends. You have two different treatments based on the facts you present. Prior to being available for rent, expenses must be included in the basis of the house and be capitalized. Example: The home has a value of $200,000, and between August and October, you accrue 20,000 of expenses getting the house ready for rent, and then you put it on the market in October. The expenses between August and October get added to the value of the home, bringing it's basis (in essence) up to $220,000. Because in October you declared the house "on the market" for rental, repairs may be deducted without capitalizing them. (Fixing a roof leak is a repair). However, improvements (remodeling a room, replacing a roof, etc.) also must be capitalized. Based on the information you provide, November and December expenses are deductions. And, as you mention, since no one was renting it, although it was available for rent, you would report $0 income and all of the qualifying expenses, which ends up in loss for the rental. Depending on your income, you may or may not be able to claim this loss against income in this tax year.
Can I claim this loss against the Capital Gains from the sale of the other rental? No, at least not directly. Any gain of the sale of the other property is reported on Form 4797 and Schedule D. Since the rental home is a business asset, be aware that you will also need to claim depreciation recapture on the sale, which is ordinary income, not capital gains. And, because capital gains are taxed more favorable than ordinary income, you really don't want your losses to deduct against the capital gain. They can be used to offset the depreciation recapture you must claim, as well as reducing your overall income if your income is not too high.
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