We've got a rental property that has been vacant since the start of the COVID pandemic. We've used this time to upgrade the property and intend to rent again starting this spring/summer. Are the improvement expenses deductible (against other/future passive income) during the vacant period?
Improvements cannot be deducted as rental expenses. They have to be capitalized and depreciated when the property is rented in the future.
No rental expenses can be deducted during the vacant period as the property was not available for rental during the period it is being renovated.
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@MinhT1 's response is not all inclusive and could be misleading.
So long as the property was "available for rent", then the property remains classified as a rental and all expenses are deductible as rental expenses. Period. End of story.
Now during the period of time you were renovating the property, most likely it was in no way "move in ready". That being the case, you do **NOT*** have to convert the property back to personal use, since your primary reason for renovating was to make the property more 'rentable" (for lack of a better term).
The "normal" expenses incurred while the proeprty was not available for rent are not deductible as rental expenses. However, they might be includable in the cost of the property improvement if tthat cost was incurred as a part of the property improvement. For example, the electric bill.
The below definitions will help clarify things for you.
RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property improvements are expenses you incur that “better” the property. Basically, they retain or 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 retain or 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.
There are rules that allow you to just flat-out expense and deduct some property improvements, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.
Cleaning & Maintenance
Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.
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.
Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.
However, when you do something like convert the garage into a 3rd bedroom for example, making a 2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.