Renovating a unit to rent out: Start-up costs, deductions, etc.

[pavben]

Hi folks,

I bought a unit in 2021 that I intend to rent out and have been renovating it. The rental unit is not yet "in service", but it should be later in 2022. It is going to be a long-term rental. I'd appreciate any pointers on how to treat (for taxes) the various costs I have been encountering in 2021. I'll list the major categories of costs here:

1. Property taxes
2. Insurance
3. Mortgage interest paid
4. Paid invoices to contractors for working on the renovation. This includes labor and materials.
5. Costs of disposing of demolition debris (dumpster rental + haul fees).
6. New appliances purchased. Estimated lifespan ~20 years.
7. Networking hardware purchased to provide Internet service to the unit once rented. Estimated lifespan ~7 years.
8. Utilities: Electric and water bills. Very low usage since it's vacant, but not zero costs.
9. Lawn maintenance
10. Travel: I had to travel to the location of the unit to check up on the project.

Some of these likely get aggregated into bigger categories, like I understand that improvements are accumulated and start depreciating over 27.5 years. I've also heard the term "start-up costs" with 15 year depreciation and $5k deduction when placed in service, although these are supposed to be for an active trade or business.

How should each of the above be treated for tax purposes in 2021?

Thank you 🙂

[ColeenD3 · Accepted solution]

The property is not placed in service until it is available for rent. All of these are added to the basis of the property and then depreciated.

Start-up expenses are for businesses. Rental property is not business property unless there are also services provided.

Rental appliances have a five-year life. You don't estimate the life of an asset. the IRS does.

Mortgage interest, property taxes, utilities, lawn maintenance, and insurance are personal expenses until the property is placed in service. The first two can be deducted on Schedule A.