Apartment rental in service determination

[jdelborne-gmail-]

We purchased a home in July 2024 that included a basement apartment. We advertised the apartment to friends and neighbors (but not publicly with a sign or internet posting) for a tenant beginning September 1. We almost had a renter sign a lease in October, but it fell through at the last minute - so we we had no rental income in 2024. We did not use the space for any personal use, and we had several repairs and improvement costs that impacted the apartment - which could create a loss on Schedule E combined with depreciation. Are we allowed to consider the apartment "in service" as of September 1 even though we did not put a sign in our yard or advertise on Craigslist/FBMarketplace?

[KrisD15 · Accepted solution]

Yes, IF you are expecting to rent the space for the fair market rental rate. 

So the issue is not that you limited the advertising to family and friends, but are you advertising at the average "going rate". 

If yes, then yes, report the property as a rental for 2024 even if you had no tenant. 

If no, the rent is less which is why you are only advertising through friends and family, then no, it is not reported as a rental on Schedule E.  A "not for profit" rental is reported as other income and expenses, only up to the amount of the income, can be claimed. 

It sounds like you would report the property as a rental starting in 2024. Repairs and improvements done before September 1 would be added to the basis (cost/value) and those done after could be expensed.