Converting primary to rental: timing of improvements for tax deductions

[Hailey Peterson]

Hello! I am interested in converting my primary residence (have lived in 7 years) to a rental. I want to make some improvements prior to renting in order to make it more desirable, but am wondering how this impacts tax deductions for the improvements: do you have to wait until you have a tenant (so that it's officially a rental) in order to claim the improvements, or can you improve first (while it's still your primary), then find renter? I can't seem to find anything definitive, as most advice pertains to properties that are already rentals, rather than conversions. Greatly appreciate any advice! 

[Michael Plaks]

@Hailey Peterson

The short answer: it usually does not matter.

The long answer has more nuances.

1. Until the property is "placed in service," it is not a rental property, it is your personal property. There are no deductions for improving your personal property.

2. There's a big difference between repairs (example: repainting or patching holes) and capital improvements (example: kitchen upgrade or new flooring). Repairs are deducted in full, and improvements are deducted in small chunks over multiple years - called depreciation. The distinction between the two is very tricky; listening to some one-hour podcast is not enough to learn it.

3. Once the property is placed in service, you can start depreciating improvements made prior to that moment. This includes improvements made while you lived there. Be careful though: improvements made well in advance (for example, a new carpet installed a year earlier) will have to be discounted to their current value, as opposed to their original cost.

4. If you want to deduct repairs, you better make them after the property is placed in service, meaning after you moved out. Otherwise, you will have to depreciate them slowly.

5. "Placed in service" date is also tricky. It is defined as the date the property was ready and available for rent. This is before you have an actual tenant in, but after you moved out and after major work is finished. If your new bathroom has not yet been put together - the property is not ready for rent and cannot be considered "placed in service." But if all it needs is new paint - then it is ready.