New ADU tax question

[Christine Monlux]

Hi all,

We're wrapping up construction on a detached ADU on the same lot as our primary residence. It's a ~500 sq-ft apartment over a two car garage. We started construction and paid for the bulk of it in 2020. Our plan is to operate it as a long-term rental immeidately upon completion which should happen within the next month or so (March 2021). We also anticipating moving in the mid-part of 2021 and will be renting our current primary residence (main house) as a long-term rental as well.

For tax purposes, my understanding is that nothing is deductible in 2020 and, as a capital improvement, the construction cost would not be deductible anyway.  Once it's rented, we plan to record income and expense like a normal stand-alone unit including depreciation using the construction cost as our cost basis.  

Once we start renting our main house, we plan to include income and expenses for both units together on our Schedule E.
 
Are we going about this the right way?  Am I missing any finer points or heading toward any significant problems?

Thanks in advance for any input.

Best,

Dan