What happens to expenses if I move into rental property?

[Jennifer Stanovich]

I am buying a rental house with proceeds from the sale of a rental duplex.  I plan to renovate the house.  There is a possibility I will ultimately move into the rental and sell my current residence.  I know I would then have to pay the deferred taxes from the sale of the duplex but what happens to the expenses I took on the rental house during the renovation?  What do I need to do to still qualify for the tax deduction on the expenses?  Do I have to rent it for a certain period of time before I move in?  If so, what happens if I can't find renters and move in without having rented it?  

Thanks for your help!

[Ashish Acharya]

Originally posted by @Jennifer Stanovich:

I am buying a rental house with proceeds from the sale of a rental duplex.  I plan to renovate the house.  There is a possibility I will ultimately move into the rental and sell my current residence.  I know I would then have to pay the deferred taxes from the sale of the duplex but what happens to the expenses I took on the rental house during the renovation?  What do I need to do to still qualify for the tax deduction on the expenses?  Do I have to rent it for a certain period of time before I move in?  If so, what happens if I can't find renters and move in without having rented it?  

Thanks for your help!

1) You have to pay taxes on the previous sale no matter you move it or rent out the new property. I am not sure if you knew that. Just buying another rental with the sale proceeds form sale of the previous rental will not defer tax even if you dont move in. You would have to do 1031 exchange if you wanted to defer the taxes.

2) No matter if you move in or occupy the house, all the work done before rental or before moving in will be added to the basis of the property. There is no deduction for that. The increased basis will decrease your gain when you eventually sell it or increase your depreciation amount if you rent it out.