Investment Property: Tear down and building Primary home

[raviss]

We bought a property as investment property earlier this year. Our current plan is to have a short term rental for it till end of this year while we work on Permits for building a new house. Assuming we leave it as rental till end of December 2021 and do our construction for entire 2022 and move into the house in Jan 2023, what will be the tax implications?

For 2021, can we consider that as a rental property? . I am hoping to find someone to rent for 6ish months, if not, would we still be able to consider it as rental if we did our best efforts in finding a short term tenant?

How should we handle the 2022 tax year? We cannot obviously consider it as a rental anymore as we are tearing it down and repurposing it?

Thanks!

[Critter-3]

Ok ... you really need to talk to a local tax pro to get all your questions  answered ... but in general : 

Once the property is put into service as a rental the income and expenses are reported on the Sch E and the cost basis is depreciated if the rental use spans over 2 or more tax years.  It is a rental from the first day you advertise it for rent and it is rentable until you take it out of service. 

Once it is no longer a rental then it is taken out of service and the Sch E is closed.  

Then the cost of the tear down is added to the cost basis of the land  and  the cost of the newly  constructed home becomes the cost basis of the personal residence.