Rental Property Acquition and Furnish, Deduct or Capitalize?

[ScottTS]

I live in NH. In 2022 I sold a large land parcel in ME, and bought a property with a house in TN, I did a 1031 Exchange.
During the exchange a trip to NC & TN was made to identify properties.
A trip was made to TN to do a thorough day long property inspection & remediation estimate.

A trip was made to TN for the closing on the purchase.

Painting and flooring was hired out.

A trip was made to TN to furnish and decorate the entire house.

A company was hired to advertise and list the property for short term rentals.

The forms and documentation for that 1031 Exchange (Form 8824) were straightforward as to what was an exchange expense, so no questions there.

For the Schedule E I've read a ton of IRS pages and docs, at well as numerous other online articles, but I get mixed messages and or unclear meaning as to what of the above trip costs are reported where. What is a deduction and what is capitalized? Can I lump all the furnishings and decor together? Are the dishware and linens treated same as the furniture?

I knew this 1st year would be hard but I've been doing a Schedule C for my wife for years so never expected this level of difficulty.

[PatriciaV · Accepted solution]

With the assumptions that the house in TN is held as a rental property and you are not a real estate professional, in general:

1. Investigation costs (including travel) incurred before the property was made available to rent would be capitalized as purchase costs as part of the basis of the property. Travel after the property was available to be rented would be a rental expense.

2. Furnishings with a useful life over three years can be capitalized as a rental asset (improvements) subject to depreciation. However, under the De Minimis Safe Harbor Election, you may expense any purchase of less than $2,500 that would otherwise be capitalized.

3. Improvements may be eligible for the Small Taxpayer Safe Harbor Election, which allows you to expense the cost if you meet the criteria.

In either Safe Harbor situation, you have the option to capitalize the cost instead. This would spread the cost over several years instead of creating a passive loss in the first year when your expenses may exceed your rental income.

To review the available elections for your rental property, see IRS How to make Safe Harbor Election.

For help categorizing your costs as repairs or improvements, see Table 1-1 here: IRS Pub 527 Repairs and Improvements.