Yes you can deduct the ordinary expenses during the year while it was vacant. You retire property from service when you permanently withdraw it from use, which is not the case in your situation.
Per IRS Publication 527, Residential Rental Property
Vacant rental property: If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you cannot deduct any loss of rental income for the period the property is vacant.
This means option 1 is allowed.
- Deduct all of the property tax, insurance, HOA dues, and utility expenses in 2021 since the intent was not take it out of service, having no idea how long it would take. Keep the rental in service and take the normal depreciation for the building.
2022:
- Your total renovation cost that is capital improvements to the building itself (attachments to the building such as roof, cabinets, etc) will be depreciated when they are placed in service (upon completion of the project and ready for use).
- If you added new appliance they should be listed separately from improvements because they have a much lower recover period for depreciation (5 years vs 27.5 years).Again when they are ready for use.
Please update if you need further assistance.
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