How to report expenses on a rental when adding an addition?

Question

We decided to add an addition, master bedroom/bath, to our rental house.  It did not go as planned and need advice on how to report expenses with no current rental income on my tax return. The rental house was shut down in July 2018 and the addition was suppose to be done in 4 months. The contractor did not begin until Oct 2018, (contractor fell off truck and broke his ribs, his business partner died, etc.) it is a long story, so I will not get into it. Eventually we fired the first contractor (losing $$$$$ we paid him) and hired a new contractor who is now reworking some of our former contractors work and finishing the addition. So there has been no income from that property and a ton of expenses, how do I report this on my tax return. Do I wait till the rental property is back in service to claim deductions and income?

Jake Hottenrott · Answer

@Lisa Casey - Sorry to hear about your series of unfortunate events.  In short, since the rental was out of service from July 18 to present, I'd report income and expenses up until that date and then capitalize the expenses addition until it's placed back into service.  Hope that helps!

Lisa Casey · Answer

Thank you Justin Fox and Jake Hottenrott for your responses. Makes sense, and not as complicated as I thought it would be when doing my taxes.

Justin Fox · Answer

An addition would most likely be considered an improvement, not a repair/maintenance, so you'd probably just add it to the property's cost basis.  This would most likely reduce a gain (if sold) down the road, and increase your depreciation deduction annually.  You might be able to finagle some of the expenses to be deductible, such as paint materials and etc.  But for the most part I think you'll just have to treat the majority of the expenses as an improvement.

Most CPAs don't charge too too much for a consultation.