Remodeling Rental Property

[okrandy]

I have spent all of 2022 remodeling a rental property.  This property was in service before 2022.  It was not offered for rent in 2022.

TTax has a box to check indicating that this property was not rented or offered for rent in 2022.  I am assuming that I should check that box.  Any affects that I should be aware of?

Please also verify that I cannot deduct any of my remodel expenses in 2022 since it was not rented or offered for rent in 2022.  Am I correct in understanding that I can only deduct these expenses once it is offered for rent?  If so, I am assuming that I aggregate all of my 2022 and 2023 expenses (assuming that it goes back on the market in 2023) and deduct those expenses then. Correct? 

Thanks.

[MinhT1]

Yes. You should check the box to indicate that the property was not rented in 2022. And you cannot deduct any rental expenses in 2022.

In general, remodeling costs are improvements which are not expensed but capitalized and depreciated.

The IRS says in this publication:

Repairs and Improvements 

Generally, an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense. 

Improvements. 

You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. 

So in your case, for 2023, you should enter the remodeling cost as an asset to be depreciated.

[okrandy]

Thank you for the response.  So, I should take this property out of TTax for 2022.  

It should be on the market in 2023. In 2023, can I deduct the 2022 expenses (2022 insurance, taxes, utilities) on my 2023 taxes?  I understand that the update expenses are applied when it goes back on the market in 2023.

Thanks.

[DianeW777]

No, you should not take the rental property out of TurboTax for 2022, you simply indicate it was not rented in 2022.  It should come forward in your 2023 tax return but keep all of your 2022 tax return data just in case you need to reenter it in 2023.  As indicated by our tax expert @MinhT1pProperty is depreciated when it is placed in service as opposed to when it is purchased.  All renovations which will be a capital improvement to the property will be a new asset to list in 2023 when it is actually placed in service for rental use.

If temporarily the property is idle see below (and not converted to personal use for any reason).

• Idle Property.  Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it isn’t available for rent. 
  • IRS Publication 527 (page 7)