Renovation prior to bringing unit in service

[jeffk422]

We have a two family apartment where we live upstairs and rent out the downstairs unit.  In 2024, we began building a new unit in our basement.  We had to switch contractors midway, but the project continues apace and will be done within the month.  My questions are:

1. How do we write off/depreciate the money spent in 2024 on the schedule E since they are for a unit that is not yet in service?

2. Since a portion of the expense of the basement unit is also for my home office (I run a fine gardening business out of my home and my equipment is stored in another part of the basement that's part of the renovation), how do I address those improvements?  I've used the home office deduction in previous years, but this is obviously substantially more money than usual.

3. Once the unit comes into service, do we handle the home interest deduction for the schedule E with two units of different sizes?

Thanks so much everyone.

jeff

[DianeW777]

See the answers to your questions below.

1. The cost of a capital improvement that is not yet complete, and not yet in use for rental must be accumulated until the day it is placed in service.  On that day you can begin to depreciate the capital improvement in full.
2. For the home office: You must determine the square feet used for the home office and the total square feet of the entire home to determine the amount to use as a home office capital improvement and expense.  The space for the equipment used in your gardening business would be a separate 'home office' or storage space for that business.  When you calculate it use the square feet for both office and equipment storage to arrive at the full space utilized.  Keep in mind that absolutely no personal use is allowed in those spaces.  It must be exclusive and regular use.
3. Use the same square fee percentage to calculate the amount of home interest, (also real estate taxes, insurance and/or utilities) to use on Schedule E and Schedule C (gardening business)

It gets complicated, as you can see, when entering this information in your tax return when there is more than one home office and multiple use property and activities.  It is easier for you in the long term to separate each portion and enter only the rental property portion, then the business and each home office space for each activity.  You should separate the expenses yourself and enter the full amount that applies to each activity.  This will keep it clean for each new year.