Rental Property Improvements Spanning Multiple Years

[username2000]

Hi I have a question about recording improvements to a rental property where the costs incurred span multiple tax years.  Here's some background:

• The property is a residential rental property.
• It was rented at the start of 2023, so there is 2023 rental income declared in 2023.
• Mid-2023 the renovation started and costs were incurred and paid in 2023.
• The renovation continues into 2024 and has additional costs incurred and paid in 2024.
• This is the same renovation. Its start and end dates are in different tax years.
• The renovation is a capital improvement and will be depreciated.

From what I've read in these forums, I'm under the impression that the depreciation starts when the improvement is put into service.  That would mean including the improvement in the 2024 filing.  This leads me to believe the sum of 2023 + 2024 renovation costs would be included together in the 2024 tax filings with the depreciation term starting mid-2024 (when the improvement is placed into service).

So if the renovation costs were $5k in 2023 and another $10k in 2024, and the renovation completes in June 2024, then this would mean a $15k improvement depreciating over 27.5 years starting in June 2024.

I have a few questions about this:

1) Is this correct?

2) Do any of these renovation costs need to be notated in any part of the 2023 filing?

3) If this is correct, will it be acceptable that a 2024 improvement has some receipts dated in 2023?

[KristinaK]

You are correct in your understanding. 

1. Yes.

2. No, no need to record in 2023 but see below. 

3. Yes, because the expenses are "capitalized". 

If your property had been a rental before the start of the renovation, then it's possible that some of the renovation expenses actually fall under repairs. Or under a safe harbor rule that would allow you a deduction in 2023. 

Here are a couple of articles that will give you more information. 

How do I handle capital improvements and depreciation for my rental?
What can I expense or depreciate with the business safe harbor election?