Converting Residence to Rental - When to start making upgrades?

Question

We are expecting, within the next 12 months, to purchase a new primary residence and convert our existing residence (SFH) into a rental/investment property. We need to make several upgrades to the current place in order to make it rent ready- new flooring, new patio doors, new deck, drywall repairs, maybe new kitchen appliances and cabinetry, etc. These upgrades are to get this property to a solid Class B type property and are either just needed in the house (new flooring for sure) or needed to keep up with other rentals in the area.

My question is, from a taxes and deductions standpoint. when can we start making these upgrades in order to claim them as deductions /  “investments” into the investment property? Can any of that work be done while we are using it as our primary residence? Or do we have to wait until we move out in order to perform the work and claim them?

Thanks for any input.

Ryan Baker · Answer

@Michael Plaks

Thank you for the input. I assumed there wasn’t a clear answer to this one. We will likely make some changes in the next 12 months for “our” appreciation and use but hold off on others intended to increase its rent-ability.

Ashish Acharya · Answer

Generally, the repairs made on your primary residence are non deductible however a  taxpayer who is an individual may capitalize amounts paid for repairs and maintenance that are made at the same time as capital improvements to units of property not used in the taxpayer's trade or business or for the production of income if the amounts are paid as part of an improvement (for example, a remodeling) of the taxpayer's residence.The money you spend right now will get added to the basis and will be recovered via depreciation or when you sell it. So, do not hold on to the rehab if it will help you find better tenants.

Michael Plaks · Answer

@Ryan Baker

This is somewhat of a grey area. On one hand, whether the updates are done while you still live there or after you move out, they will be done before the property is placed in service for rental purposes and therefore treated the same for future taxes.

On the other hand, if you are still living in the property, you jeopardize your claim that the updates are done in order to rent this property. It can be argued that they are done for your personal use, potentially complicating the situation. My advice is to do the updates as close to move out as possible, as opposed to 12 months in advance. And do not replace appliances until you move out.