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When converting a second residence into a rental property mid-year, how do you treat improvements completed prior to placing it in service?

I converted a personal property into a rental property placed in service Nov 1st. We did a bunch of improvements (including bathroom & kitchen remodel) in the beginning of the year prior to placing it in service. Do those improvements all get added to the cost basis of the house or can I take some expenses in full as safe harbor repairs and improvements? If what I paid for the house plus improvements is less that current fmv, do I use original cost plus improvements or current fmv as my cost basis for depreciation?

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Accepted Solutions
Coleen3
Intuit Alumni

When converting a second residence into a rental property mid-year, how do you treat improvements completed prior to placing it in service?

Yes, they are added to the basis of the home. Once you place the property in service, you can potentially deduct expenses and improvements. You use the lower of the FMV or adjusted basis for converted property depreciation. Improvements are included in your adjusted basis.

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1 Reply
Coleen3
Intuit Alumni

When converting a second residence into a rental property mid-year, how do you treat improvements completed prior to placing it in service?

Yes, they are added to the basis of the home. Once you place the property in service, you can potentially deduct expenses and improvements. You use the lower of the FMV or adjusted basis for converted property depreciation. Improvements are included in your adjusted basis.

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