Rental property improvement project across multiple years

[stanleyli]

We made an improvement on our rental property. It started from 2021 and just finished in 2023 since we had some troubles to get the permit from the city.

How should I report this case?

1. Should the city permit fees also go into the capital improvement and be depreciate in 27.5 years?

2. Should we count all expenses related to this project as capital improvement in the tax year 2023 (even though some of them occurred in 2021 and 2022) since the project was not put in service prior to that?

[AnnetteB6 · Accepted solution]

Yes, since the city permit fees were part of the cost of the project, add them to the other costs where they will be depreciated with the improvement itself.

Yes, you would consider all expenses for the project to be part of the total cost which will be depreciated starting when it is placed in service in 2023.  This does include expenses that you incurred in 2021 and 2022.

[Carl]

As a side note and for clarity, understand that absolutely nothing concerning this property improvement will be entered on your 2021 or 2022 tax return, since the improvement was not "in service" until the 2023 tax year. Therefore, you'll enter this property improvement on your 2023 tax return when you complete it next year.  Depreciation will start in 2023 on whatever date the work was completed and placed in service in 2023.