Holding costs included in basis or expensed?

[Jeff O'Neal]

While rehabbing a property prior to putting it on the rental market, are holding costs added to the basis as a capital improvement or treated as deductible expenses?  I'm referring specifically to costs such as utilities, taxes, insurance, lawn care, etc.  What about mileage to and from the property during the rehab process?

[JD Martin]

Some costs have to be added to the property and depreciated (closing costs, for example) and others can be deducted straight off. How you do it will depend on the amounts, but you can include all of those holding costs with your rehab costs if you are below the total threshold amounts specified by the IRS - you can even include "capital" costs in that one-year deductible if you are below the threshold, though you need to decide if you need the deduction now or in pieces as time goes by. For example, one rehab we did last year had everything deducted single year - mileage, utilities, everything - while another we split out some of the larger CIPs because we will need those deductions for non-rehab years.