In mid 2015 I purchased a house with the intention of completely renovating it and renting it out. The renovation is now complete with approximately half of the renovation cost incurred in 2015 and half in 2016.
Half of my total renovation costs were financed (i.e., part of my mortgage) while the other half I paid in cash out of my pocket.
No tenants have occupied the house yet and no rental income has been received.
My big question is:
Should I treat this house as a second home or a rental property on my 2015 taxes?
I've read that if I treat this house as a rental property, then the renovation cost is a capital expenditure that I can claim on my taxes by depreciating it over 28 years.
I've also read that if I treat this house as a personal second home, then I cannot do that because the renovation costs are considered non-deductible personal expenses.
This makes it seem like treating the house as a rental property is clearly the better option. However, I do not know what would happen to my mortgage interest deduction if I treat the house as a rental property.
According to the IRS, mortgage interest on a rental property can be deducted. But does mortgage interest get deducted against my total income or only my rental income? If it's the latter, and I don't have any rental income yet, does that mean I can't deduct any mortgage interest?
If I treat the house as a second home, then I know I would be able to deduct 100% of the mortgage interest I pay on this house because my total mortgage debt is under $1.1 million.
Any guidance would be much appreciated!