If you purchase a property for renting out to tenants, or if you convert your residence to a rental property, you may have fix-up expenses to get the property ready to be rented. These expenses can generally be deducted on your tax return as rental expenses against the rental income you receive once you rent the property. You would have to separate the costs between maintenance and repair expenses, and capital improvements. The maintenance and repair expenses can be deducted in the current year and the cost of the capital improvements would be recovered through depreciation deductions.
The costs of cleaning, painting, and making minor repairs would be considered currently deductible maintenance and repair expenses. Examples of additions or improvements that would be capitalized include flooring, appliances, a furnace or air conditioning system, a water heater, and kitchen modernization. In Publication 527, Residential Rental Property, the IRS provides other examples of improvements.
If you keep records of additions and improvements you make to the property, you can segment the depreciation by item and recover the cost over a shorter life for certain items for tax purposes. For example, if you install new appliances, they can be depreciated over a shorter life than the rental property itself.
You should keep in mind that the value of property converted to rental use for tax depreciation purposes is the lower of the property’s fair market value at the date you convert it to rental property, or your adjusted cost basis in the property. And if your cost basis includes the value of the land, you would have to subtract that out since land is not depreciable.
Depreciation starts for tax purposes when the property is placed in service and ready for renting. If the property remains vacant for a period of time before you rent it, you can calculate depreciation from the date the property is ready to be rented, and not when you actually start renting it.
According to the IRS, you can deduct your ordinary and necessary expenses of managing and maintaining the property, including depreciation, while it is vacant. But you could not claim a deduction for the loss of rental income while the property is vacant.
If your expenses related to the rental property are more than your rental income, you have a loss. If you, or your spouse if you are married, actively participated in the rental activity, you can deduct up to $25,000 of the loss from other income on your tax return.
Publication 527, Residential Rental Property, IRS