the repair involved tearing out tile, replacing shower pan, re-tiling bathroom. Does the re-tile count as improvement?
I disagree with @smarttees because the work meets the IRS definition of a property improvement, without question. The entire job is a property improvement because it was all done at the same time, to take care of a single problem/issue. While it also meets the definition of a repair, a repair does not "add value" to the property, whereas a property improvement does. There is no questioning that the new pan and re-tiling the bathroom adds "real" value to the property.
Listing this as a repair "may" cause a problem too. Using your dates, the property may have been converted after you moved out, and prior to the tenants moving in. However, the property was not "in service" until "AFTER" the bathroom was completed. The "in service" date is the earliest date a renter "could" have moved in. Since they could not move in until the bathroom was usable, it was not in service before the completion date of the project. So any repair expenses are just flat out not deductible at all. Based on your dates, since the project was completed July 14th, the earliest possible "in service" date would be July 15th. The lease effective date is irrelevant actually.
Property Improvement.
Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.
To be classified as a property improvement, two criteria must be met:
1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.
2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.
Repair
Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.
