Deducting repairs made in 2016 to prepare room for rental in 2017

[Nehel0]

I started renting from Jan 1st 2017. It took about 3 months and over 20,000$ in repairs to prepare the area for rental from oct - dec 2016. This is very large amount obviously and I was hoping to deduct all these expenses on my 2017 returns Schedule E as the unit is still in a loss (earnings for 2017 are less than the expenses to repair the place). Without deducting them, I'd end up paying positive taxes on a loss, which doesn't make any sense. However, my receipts are all from 2016 so I'm not sure how to note it in my bookkeeping and keep safe incase of an audit. Should I just create an expense category called carryforward 2016 repairs or should I file an amendment to my 2016 returns showing the loss and depreciation?

Thank you all!

[Matthew285]

@Nehel0 was all $20,000 of the work actually repairs, or was some of it improvements?

Taxwise, repairs and maintenance are treated differently from improvements.

(Note: I am not a CPA. I just like reading about tax stuff.)

Improvements are added to your basis for the property, and so really don't affect your taxes until you sell the property. (Unless, of course, this is purely an income property, in which case it affects your depreciation.)

It might be worth consulting a CPA about it.

[Raf3]

@Nehel0 I'm a licensed California tax preparer that specializes in short term rentals like AirBnb. Please take a look at my AirBnb tax tips here. As Matt mentioned you first have to determine whether these were really repairs. The timing of the work done, amount of work, type of materials used, amount of rehab, etc...can be a deciding factor in re-classifying work you thought might be an improvement, to a repair. There are also several safe harbors available that allow you to deduct regardless of classification.

Your bookkeeping will depend on whether you add to basis like Matt said (also known as capitalizing i.e. adding to the cost of the asset - your home - on the books) or whether you expense the work done as a repair. 

Filing an amendment to your 2016 could net you some serious benefits.