We are converting part of our home to a rental apartment. How should we consider these costs for our taxes - deductible expenses or as improvements to our home?

[jenward1966]

We will be upgrading from 1/2 to 3/4 bath, putting in a separate entrance and small balcony, repainting, and shifting some walls around. Some is clearly adding value to our home, other not so clearly, just changing it up - and none of it would be done if not for the goal of renting it out. Also, I own the home jointly with my brother and husband, so that does complicated it a bit more - we were planning to create a separate LLC and run the rental income and expenses through the LLC.

[SweetieJean]

"we were planning to create a separate LLC"  Which state? A husband/wife LLC in a non Community Property State must file as a Partnership (Form 1065).

[jenward1966]

We are in Washington, a Common Property State. And it will be a 3 person LLC - me, my husband, and my brother.

[Hal_Al · Accepted solution]

None of that is deductible expenses. It is all improvements and will added to the cost basis of your home. The portion attributable to the apartment will then be depreciated for your cost deduction, once it's available to rent.

Even items that would normally be expenses (e.g. painting) must be capitalized (added to your cost basis) because the work is being done to get the unit ready to rent.