Expenses on a vacation rental

Question

We bought a vacation house in 2020, which we plan on renting out in 2021 after some renovations. I think I understand the tax implications for the renovations.

Furniture under $2500 is considered an expense and can be deducted from the rental income. The problem is that we plan on buying furniture in 2020 when we have no rental income.

Is there any way to deduct purchases in 2020 against 2021 rental income? Since this is for short-term weekly rentals we need to purchase everything for the house (including beds, tables, plates, glasses, towels, linens, etc..) Does that make a difference to the answer?

Answer 1

Typically, improvements to the house and furnishings are depreciated rather than taken as expense up front. There is a de minimis safe harbor election that allows you to take the full $2500/improvement as an expense instead of depreciating it. There are also depreciation methods that front-load the depreciation expense for the first year(s). You don't have to choose those options just because they are available to you. You can depreciate furniture for five years rather than take the de minimis election.

It's usually preferable to take the expense up front (unused expenses in one year can be carried forward). There's a lot to think about and get right here, so it's likely worth your while to consult a local CPA who knows vacation rentals to make sure you're properly handling startup costs, expense deductions (especially depreciation), and know the ins/outs of personal use rules and their tax consequences. That doesn't mean you need them to prepare your taxes every year, but getting started on the right foot can save a lot of hassle and unpleasant tax surprises down the road.