Rental property improvement project across multiple years

[stanleyli]

We made an improvement on our rental property. It started from 2021 and just finished in 2023 since we had some troubles to get the permit from the city.

How should I report this case?

1. Should the city permit fees also go into the capital improvement and be depreciate in 27.5 years?

2. Should we count all expenses related to this project as capital improvement in the tax year 2023 (even though some of them occurred in 2021 and 2022) since the project was not put in service prior to that?

[Hal_Al · Accepted solution]

Q. How should I report this case?

A. You start depreciation in 2023, the year the improvement was placed in service.

Q. Should the city permit fees also go into the capital improvement and be depreciate in 27.5 years?

A. Yes.

Q. Should we count all expenses related to this project as capital improvement in the tax year 2023 (even though some of them occurred in 2021 and 2022) since the project was not put in service prior to that?

A. Yes

[JohnB5677]

You can include the improvement expense when it is placed in service, A property is considered placed in service when it is “ready and available for rent.”  In your case if it was available in 2023.  You would include the improvements on you 2023 tax return.   

Yes, the city permit expenses should be added into the Cost basis.  

Yes, you should include Please see Publication 527 Adjusted Basis.

"Additions or improvements.

Add to the basis of your property the amount an addition or improvement actually costs you, including any amount you borrowed to make the addition or improvement. This includes all direct costs, such as material and labor, but doesn’t include your own labor. It also includes all expenses related to the addition or improvement."

In general, yes, please see should count all expenses related to this project as capital improvement in the tax year 2023.  Publication 527 Placed in Service.