Rental Property - New Construction with Existing Building - Tracking expenses & depreciation strategies.

The answers to your questions are shown below.

QUESTION 1: Do I need to split out expenses during construction and/or operating expenses going forward, or can I just lump them together. Again, only would be doing this for tax purposes if necessary or beneficial. I'm thinking like do I need to track basis separately or something - particularly if I end up doing a substantial renovation or demolition/replacement of the existing house in the near future.

1. Operating expenses do not necessarily need to be broken down if you are treating this as or want to aggregate the activity.
2. Basis should definitely be tracked separately for each building.  When you sell a building down the road you want to have each asset listed separately for each one even if aggregating as one rental activity with several assets.
3. Capital improvements and/or renovations will be a separate asset but will also belong to one building. Think about that when you name the assets as you enter them.

QUESTION 2: I use de minimis safe harbor election (1.263(a)-1(f)) on this property. I do not believe I can use this on the new construction even though my contract breaks the costs down to below $2500 / item, or am I incorrect? Is there another recommended method of advancing depreciation? Should I be looking into cost segregation (I'm an architect so we've prepared these for clients before - but never understood how they affected their taxes) or something else? I'm looking for some direction so I can do my owner deep dive into it.

1. Yes, you are incorrect.  There are two types of safe harbor: 
   1. $2,500 DeMinimis Safe Harbor for equipment - This election is an option you can take each year that lets you write off/deduct items $2,500 or less as expenses instead of assets.
   2. Safe harbor Election Small Taxpayers: Here are the rules you need to meet to take this election:
      1. Your gross receipts, including all your other income, are $10,000,000 or less.
      2. Your eligible building has an unadjusted basis of $1,000,000 or less.
      3. The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits:
         • 2% of the unadjusted basis of your building or
         • $10,000
   3. What can I depreciate or expense with the business safe harbor method?
2. Simply, cost segregation is a tax deferral strategy that identifies assets within a building that can be depreciated over a shorter period.  The building itself and the capital improvements such as a roof, a room addition, siding, or other attachments to the building itself will be depreciated over the usual 27.5 year for residential rental property. 

You've got this.  Ask questions here whenever you need assistance.

I never got to thank you for your detailed response, and I do have a followup question at this point...

So I will be using the Demin Safe Harbor Approach (option 1) above for the new buildings, as it's easier and I use it on the existing building on-site. I'll track each 'building' separately, for basis purposes (although the basis on the new buildings will virtually be 0 I believe, since the entire construction is broken down into segments under 2,500). I'm not quite into the weeds on that yet, as I'm just finishing up my bookkeeping. Note, the buildings could never be sold separately (zoning/utility/local laws), but the existing building can qualify for historic tax credits that relate to basis, so I'm thinking this is still the best approach.

NEW RELATED QUESTION:

I do not believe this affects me if I use the method above, but my construction has lengthened to now span two tax years. Does this affect this approach in any ways? (I believe with traditional depreciation it does, as the buildings are not 'in use' until the end of the project - we always have clients trying to rush certificates of occupancy at the end of the year due to this)

As a quick reminder, the new buildings are being built in the backyard of an existing rental property that has been in service for several years (and remains in service, even during construction).

No, the length of time for the project does not effect the de minimus safe harbor deductions that you are taking already.

Everything else that you've planned sounds very reasonable.

@Waterl