I inherited a home in March 2018. We are renovating, will rent in 2019. Can I deduct construction costs and property taxes on 2018 return?

[hurthfam]

We refinanced our primary residence to pay for repairs to my inherited house.  I (Jenny, spouse) own the second house, we own our primary residence jointly.  We have spent about $45,000 so far, we are doing the work ourselves.  We had no rental income in 2018 from the second house.  The house was owned until 3/6/18 by the previous owner.

[Opus 17]

You can deduct all property taxes you pay on schedule A, but this is subject to the $10,000 state and local tax cap.

You can't deduct the property taxes on house #2 as rental expenses on schedule E because the home is not currently available to rent or rented.  Once you list the home for rental, your taxes from then on become rental expenses.

You can't deduct the mortgage interested on home #1 that you used to pay for the renovations to home 2.  That's equity debt and is not deductible as personal mortgage interest on schedule A.  Once you hold home #2 out for rental availability or rent it, you can deduct the interest as a rental expense, but not the principle.  And you can only deduct the interest as a rental expense if you maintain traceability between the loan and the improvements.  If you start taking money out of home #1 for other expenses, then it becomes much harder to trace the interest directly to the rental improvement and your deduction is at risk if audited.

You never deduct renovation expenses.  They become part of the new cost basis of house #2 when you start claiming a deduction for depreciation on house #2 when you hold it out as a rental.

[pk]

As I understand your question --- what do I do with expenses on a  rental property with zero rent?

A property that is already a rental property i.e. it either has been used as rental before ( paused for repairs/improvements in between  renters ) it is easy in that you still report everything on schedule -E and because of zero gross rental income, all the expensable expenses and the depreciation will become losses or suspended losses.

A property that has not been yet characterized as rental property, there is no schedule-E to report and therefore all the improvements are added to the basis of the property. Most often incidental items  like cleaning  etc in preparation for rental would go as part of rental expenses --- should try to do this in the same  calendar year as the property is put up for rent, even if it actually rented the following year.

Does this help you?