Real Estate Professional Rental Deductions

[lbones]

I have a real estate professional that works full time as an owner and realtor of their company.  She also own a couple of properties that they derive some short term rental income.  Also, during the year, she continue to renovate the properties.  My question is, are the renovations completely deductible in the year incurred or when the properties are completely ready for intended use.  It seems that if the short term income is in the range of 20k for each property and the renovations are in the 30k to 50k range that it doesn't pass the smell test.  I have never had a real estate professional that also has rental property and any guidance would be appreciated.

[Terry53029]

If the units were available for rent during the remodel the deprecation would be completely deductible. If not available then it just gets added to her basis  

[abctax55 · Accepted solution]

Are you asking if the $ 30- 50K can be expensed?

Terry's observation is correct; IF the property is still available for rent during the renovations the costs are 'deductible'..... but that doesn't change whether the costs have to be capitalized & deducted thru depreciation, or expensed as repairs/maintenance.  It depends on the nature of the cost(s), and perhaps the amount.  Research TPRs -Tangible Property Rules (or is is Regulations?)

[lbones]

My apologies, i should have been clearer,  In 2024 on property A, they had rental income in the amount of $9k (short term 3 weeks at $3K each), with renovations in amount of $50K,  They expect in 2025 to have approximately the same amount of each.

With continued renovations going on over the next year or so and the rental income being short term and very small, can the $50K be completely expensed.  

[lbones]

Those that can be expensed vs those that will be capitalized.

[BobKamman]

If you're looking for a smell test, this has the scent of a vacation home where there is also personal use, maybe of the "well, we had to stay there while we were doing renovations" variety.  

[TaxGuyBill]

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@lbones wrote:

 with renovations in amount of $50K, 

can the $50K be completely expensed.  

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"Renovation" seems to indicate a "betterment" or a "restoration", which is depreciated when the improvement is placed in service (short term rental is generally depreciated over 39 years, unless it qualifies for 15 year Qualified Improvement Property), not "expensed" (not deducted in one year).

https://www.thetaxadviser.com/issues/2021/oct/capitalized-improvements-vs-deductible-repairs.html

[qbteachmt]

"can the $50K be completely expensed."

Here's how I teach this:

A broken window is repaired, even if by replacement = directly deductible. A repair Expense.

All the windows are replaced with hurricane resistant = capitalized and depreciated. An improvement that is a renovation or remodel activity. It's an expenditure that is an investment in the property for its future (this wording helps clients understand it).

New walls and other structural work and system changes (new sewer line) would never be expense. And any engineering or architectural costs for a renovation, permits, would be part of capitalization. New deck? Capitalize. Fix some stairs? Expense. Replace the stairs, needing building permit? Capitalize.

In a rental, you go through some segregation, too. New appliances is not the same as a new garage door.