Expenses prior to renting house out.

[BlueRidgeMt]

I had a primary residence that I have made into a rental property. Quick outlines as follows

In June 2020 I moved out and empty the house.

In August I've hired a management company to oversea all repairs/maintenance work prior to renting the house out. Repainted, repaired leaking toilet...etc.

In October the house is officially on the market for viewing and application.

In November I had a roof leak repair that was done. 

In December the house is still on the market and I had to hire landscaper/cleaner to tidy up.

So I am still several thousand dollars negative on this house. 
What do I do with all the expense?

In addition, I sold another rental property completely separate from this unit in another state, and profited some money that's taxable under long-term capital gain. Can I deduct the loss I had from the one house against the gains from the sale?

[Critter-3]

In August I've hired a management company to oversea all repairs/maintenance work prior to renting the house out. Repainted, repaired leaking toilet...etc.   These cost add to the basis of the property for depreciation purposes.

In October the house is officially on the market for viewing and application.  This is the first date of rental use even if you do not have a tenant yet ... it is on the market.  Depreciation may now start. 

In November I had a roof leak repair that was done.   Deductible expense on the Sch E.

In December the house is still on the market and I had to hire landscaper/cleaner to tidy up.  Another expense on the Sch E.

Can I deduct the loss I had from the one house against the gains from the sale?  In a way ... the allowed loss on the Sch E can be used against other income on the return not just against the cap gains on the Sch D.  

I highly recommend you seek local professional assistance if you are not 100% certain of what you are doing.  It is worth the cost to get the education you need and the peace of mind it is done correctly.  

[DanielV01]

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.  

[Carl]

@Critter-3 

In August I've hired a management company to oversea all repairs/maintenance work prior to renting the house out. Repainted, repaired leaking toilet...etc.   These cost add to the basis of the property for depreciation purposes.

I beg to differ on that. When converting from personal use to a rental, repair and maintenance expenses incurred in preparing the property to rent the very first time are flat out not deductible. This is based on IRS Publication 527 at https://www.irs.gov/pub/irs-pdf/p527.pdf on page 18, column 3, first paragraph under "Example-Property Changed to Rental Use" where it lists examples of deductible expenses right below that first paragraph. One of the examples is "Miscellaneous repairs (after renting)".  To me, this indicates that repair expenses incurred before the property was available for rent are not deductible at all, and definitely don't get added to the cost basis of anything.

It's also possible that any monies billed by the management company before the property was available for rent, may also not be deductible. Or at least the applicable amount incurred before the property was available for rent.

[BlueRidgeMt]

I understand the first part fully.

The second part I would like to clarify that it's possible that I can use the losses for the rental to go against the depreciation recapture on the sale? I am aware I have a huge amount of depreciation recapture, the "loss" from is not even remotely close. 

[Critter-3]

Once again ... the Sch E loss (if allowed) will negate other  income on the 1040 ... review the form 1040 to see how this happens automatically. 

[Carl]

It's not at all uncommon for residential rental real estate to show a loss "on paper" at tax filing time, every year the property is in service and rented. Since losses that exceed rental income get carried over to the next year, it's common for those carry over losses to increase with each passing year. Then, those losses are realized in the tax year you sell the property.

There's also an allowance, depending on your AGI, that allows you to deduct up to $25K a year from other ordinary income. So it's also possible you won't have any carry overs to deal with each year. It just depends on your AGI, along with the actual rental income received and expenses incurred.