How to report expenses for converting second home to a rental?

[peteZ88]

We are changing our second home to rental use in January.  In the previous year, we had expenses to outfit the kitchen (utensils, toaster, coffee maker, mixer, etc) and bedrooms (bedding, mattress covers, window curtains, etc) to get it ready for rental use.  We know we can't expense these items since they were purchased last year.  But can we add these startup expenses to the adjusted basis of our rental at the time it was is into service this January?  If not, how would we account for these startup expenses.  We plan on using Schedule E for expenses this year.

[MarilynG1]

Any minor expenses or repairs you did to the property prior to making it available for rent are not deductible.

Any major improvements you did, can be added to the Cost Basis you report when you set up the Rental Property. 

If you are renting as an Airbnb-type situation, those items you mentioned would be rental expenses when purchased after the property is available for rent.

Everything hinges on the 'date placed into service'.  Before that date, not deductible; after that date, probably is.

Here's more info on Rental Property Expenses and Tax Tips for Vacation Home Rentals.

[peteZ88]

1)What if I did not use it as a personal residence first, but instead converted it to rental use in 2024 after construction was completed in 2023.  In this case can all these miscellaneous costs (listed earlier) from 2023 or earlier, before the property was ready to rent in January 2024, be incorporated into the adjusted basis as start-up costs?  Or can I lump them together and list them asdepreciable 3-year or 5-year assets.  For example, could I list bedding/curtains/etc. as one asset and depreciate, Kitchen items (toaster, coffee maker, utensils, pots and pans) as a second asset and depreciate, and Bedding (linens, curtains, etc.) as third asset for depreciation.  Any other way to account for these startup expenses?

[peteZ88]

1)What if I did not use it as a personal residence first, but instead converted it to rental use in 2024 after construction was completed in 2023.  In this case can all these miscellaneous costs (listed earlier) from 2023 or earlier, before the property was ready to rent in January 2024, be incorporated into the adjusted basis as start-up costs?  Or can I lump them together and list them asdepreciable 3-year or 5-year assets.  For example, could I list bedding/curtains/etc. as one asset and depreciate, Kitchen items (toaster, coffee maker, utensils, pots and pans) as a second asset and depreciate, and Bedding (linens, curtains, etc.) as third asset for depreciation.  Any other way to account for these startup expenses?

[PatriciaV · Accepted solution]

According to IRS Pub 527 - Pre-rental Expenses

     "You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent."

As MarilynG1 said, repairs and purchases made before you list the property as a rental are not deductible. Improvements that restore the property or adapts it to a new use may be added to the basis of the property or considered a separate rental asset.

Start-up costs are limited to:

• Legal and accounting fees that are associated with acquiring the property or setting up the rental business.
• Inspection and appraisal fees that are paid before purchasing the property.
• Marketing and advertising costs to find your first tenant.
• Loan origination fees paid when getting a mortgage for the property.