Is a rental property that is being renovated still eligible for depreciation and other expenses?

[pavben]

I have a residential rental that was being rented out and I'm taking the depreciation deduction on it. Then the tenant moved out during 2023 and I decided to renovate it, which is taking multiple months. Does this property continue to be eligible for the depreciation deduction while it's vacant? What about other expenses such as yard maintenance/upkeep?

Also, I'm accumulating the total cost of improvements and also new appliances purchased to add those as depreciable assets once the unit is ready for another tenant. I assume new appliances aren't in service until the unit is advertised for rent, right?

Thanks 🙂

[Carl]

If you intend to rent it out once the work is complete (and you actually do rent it out) you can leave it classified as a rental. Of course, depreciation on existing assets will continue. Me personally, I would convert it to personal use to stop depreciation. But you don't have to. Not stopping the depreciation would only be a "potential" issue if you changed your mind and didn't rent it out once the work was complete.
As for the new appliances purchased during this time along with the cost of any other improvements/renovations, you wouldn't start deprecating them until all work is complete and the property is once again move-in ready.
Your maintenance cost are deductible so long as the property is classified as a rental.
The reason I would convert to personal use for such a long period of "down time" would be to stop the depreciation on the existing listed assets. Remember, depreciation is not a permanent deduction. You will have to recapture and pay taxes on it in the tax year you sell the property.

[pavben]

Without stopping depreciation, I would have a loss on this activity for the year.

To check my understanding:

1. The losses would accumulate until I can apply them against some passive gains such as rental income in the future, right?

2. I can't apply this loss against my W-2 income unless I qualify as a real estate professional (I don't).

3. I can apply it against passive investment gains, right? Although those generally have a favorable capital gains rate, so I'd wait for rental income.

Please let me know if these are correct 🙂

I don't have plans to sell this property, but rather keep renting it. I guess because of depreciation accumulating faster than income during this period, it would result in tax-free rental income until this portion of accumulated depreciation is used up. This is not a bad scenario. I think I see what you mean about recapture though if there was likelihood that I'd be selling in the near future. I would have to repay that depreciation while still having a passive loss (which depreciation contributed to) and still having to find some passive income to apply it against? Or would the loss be applicable to reduce the gain from the sale and thus not be an issue?

[tagteam]

See https://www.irs.gov/publications/p527#en_US_2023_publink1000219042

Your understanding is generally correct, @pavben