Rental Property Renovation Project with payments in different tax years

[Kayteem]

I have a rental property that underwent a renovation starting in May of 2021, ending in February 2022. The property was not rented during this time. Some items such as the windows were replaced in 2021 and all invoices paid and accounted for in 2021. The HVAC system was completed with all payments in 2022. This is where it gets confusing for me. A contractor is doing the remaining work, which includes replacing all flooring, painting cabinets, painting walls/baseboards, new interior hardware, countertops, etc. I paid a progress payment for $3500 which was accounted for in 2021, with a final payment due in 2022. My questions:

1.  I’m not sure how to enter the contractor’s project for asset depreciation since partial payments will be in different tax years. Should I enter an item in 2021 called “Renovation Progress Payment” and start depreciating the $3500 in tax year 2021, then add “Renovation Final Payment” asset with the final payment in tax year 2022? Since the property will not be rented until 2022, should I holdover the $3500 payment and add it to the total in 2022?

2.  Could the windows, HVAC, and Contractor Project all be listed as one depreciation item on my 2022 return, even though a partial payment was in 2021?

3. Do I need to do anything else since the property was not rented for 10 months? There was no personal use.

Thank you in advance.

[DianeW777 · Accepted solution]

The answers to your questions are listed below for your convenience they are numbered in the same fashion.

1. No, as long as the property is not available for rent, the asset of renovations holds until that day.  Once the property is available for rent again, then you will add all of the costs for renovation and enter that asset for depreciation with a starting date in 2022.

2. Yes, this is the correct way to report this asset.  The rental unit must be available to rent and marketed as such.

3. Yes. Since you did have activity in 2021, you can continue with the expenses because the intent was not to remove it form service.

Per IRS Publication 527, Residential Rental Property  

Vacant rental property:  If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you cannot deduct any loss of rental income for the period the property is vacant.

• Property Profile (TurboTax CD/Download or Rental property info (TurboTax Online)
• Edit the Days at Fair Rental Value after saying the property was not rented all year
  • Do not enter any personal use days

See the image below - it will look similar in both versions

[Edited: 02/24/2022 | 1:44p PST]    @Kayteem