Start-up expenses– tax conundrum

[Susan Johnson]

Hi all,

I'm a bit lost, and am really hoping that one of you might be able to help. I'm getting ready to file my 2020 taxes (had an extension), and am struggling to figure out how to handle my 2020 rental income, from a tax perspective. December 2020 was the first month I showed income for this property, and I lived in it the rest of the year, so it's a little tricky.

I lived in the home for all of 2020, through early November, when I decided to convert it to a short-term rental property, with an aim to renting it out from mid-December 2020 onward (through all of 2021, etc.).

I spent a bunch of money on rental set up expenses in November and December, 2020– updates like painting, repairs, buying supplies (bedding, dishes, etc.) and furniture (sleeper sofas!) needed to rent it out. I also personally worked night and day for most of November and early December, to get it ready. The costs came to around $10,000. 

I've read all about the 14 day rule, expensing vs. capitalizing assets udner $2500 (such as furniture), etc., and I know that one is able to claim *some* start-up expenses before the property is placed in service... but I am not sure how to apply all of this to my particular situation.

Can someone give me an idea of how I would handle this? I just want to make sure that I am able to claim my pretty significant start-up expenses in *some way*– even if it's just depreciated across future years of rental income.

Here are some more pertinent facts:

- The property was "placed in service" (available for rent) around December 12, and was actually rented out from December 19-31.

- I stayed in the house to prep the property from November 1-December 12.

- I am 100% fine with capitalizing or carrying forward any expenses made in 2020– as long as I get to take them somewhere!

- I've rented the house for almost all of 2021, with the exception of 6 weeks I took there in the spring, to take care of some important updates and maintenance. So, I plan for the house to definitely be considered a "rental property" in 2021 and at least part of 2022. Not sure after that.

- I am not an LLC or anything fancy, so I'm planning to file a Schedule E

- Because of my tax situation, I actually prefer to take the deductions in 2021 vs. 2020.

- Not sure this matters, but I am filing jointly with my husband for 2020, but will file on my own in 2021 (divorce :( ), so my tax bracket will be much lower in 2021.

My tax prep guy doesn't really know alot about rental properties, but said he could "probably figure it out" :/ But I am sure there is a lot of knowledge in this forum that can help.

Thank you in advance for any thoughts/advice you might have!

Susan Johnson
Duxbury, VT