A rental property kitchen remodeling project was stopped by contractor due to bankruptcy. I lost a $14,000 deposit. Can this loss be deducted from 2021 rental income?
No. But it's not lost. Keep reading. (And keep every single receipt too! That's important!)
I also purchased new appliances for this project, but they have not been installed yet.
If the appliances are "a part of" the remodeling project, they generally are not entered as separate items. But they can be. They're "generally" included in the total cost of the remodel. More on that below.
Can I deduct their cost or add as an improvement?
What you have here is a property improvement. Your cost of this improvement gets entered in the Assets/Depreciation section, classified as residential rental real estate and depreciated over 27.5 years. You will not enter this on your tax return until the tax year the property improvement is place "in service". It *does* *not* *matter* in what tax year you paid for it either.
So if you paid the contractor in 2021 but the job was not completed and the remodel placed "in service" until 2022, then you will enter absolutely nothing what-so-ever concerning this, on your 2021 tax return. You'll deal with it on your 2022 tax return next year. Again, it's a property improvement, so it gets entered in the assets/depreciation section and depreciated over 27.5 years.
Have hired another contractor to finish this job in 2022
So your total cost for this job will be whatever the new contractor charges you *PLUS* the $14,000 deposit you paid to the now defunct/missing contractor. The total is classified as Residential Rental Real Estate and depreciated over 27.5 years with depreciation starting when the assets are placed "in service". Per your post, that didn't happen in 2021. Therefore nothing concerning this remodel will be entered on y our 2021 tax return. It will be entered on your 2022 tax return, assuming the work is completed and the property is "in service" at some point in 2022.
Now for the appliances. You have several options here.
1. Since the appliances are "a part of" the remodel, you can just include their cost in the total and be done with it.
2. Appliances are depreciated over 5 years. So you can enter the appliances as separate assets on your 2022 tax return next year, classify them as appliances and the program will set it up for 5 years of depreciation.
3. Since the appliances are new and have no "personal use", you also have the option to take a SEC179 deduction on the appliances which allows you to fully depreciate them in the first year they are placed in service.
4. You may also have the option of just expensing and permanently deducting the cost of appliances *IF* the cost for each item is shown on the invoice, and the cost of each item is under $2,500. If you take this route, it's referred to as the "Safe Harbor DeMinimus" election. If you take this election you can't e-file the return. You'll have to print, sign and mail it to the IRS with a signed statement. (This could cause issues with e-filing a state return.)
For the safe harbor election, there are certain very specific tasks and procedures you *must* follow and requirements you "must" meet. See IRS Publication 527 page 5, section titled "Deminimus safe harbor for tangiel property" at https://www.irs.gov/pub/irs-prior/p527--2019.pdf and IRS Publication 535 page 4, starting with section titled, "De minimus Safe Harbor for Tangible Property" at https://www.irs.gov/pub/irs-pdf/p535.pdf
