Personal Residence Converted to Rental

[Forensicacctnt]

Client had expenses in 2018 to improve their personal residence to be rented via Airbnb, VRBO, etc. Home was not ready to be rented in 2018, but will be ready in 2019. Two questions: The couple's two sons will be living in the basement of the home which has been enhanced for living quarters. Will this fact violate the tax rules for the home to be classified as a rental on their tax return in 2019? If the home can be treated as a rental in 2019 can any of the expenses incurred in 2018 be deductible in 2019 or are they lost? Thank you.

[ATSMAN]

Not related to the Airbnb business but when I have to deal with a personal residence converted to rental this is how I deal with it:

1) Capital improvements made prior to the rental start are capitalized and added to basis. In one situation a portion of the improvements continued 6 months after rental period and they were amortized and deducted over 27.5 years straight line method.
If a portion of the house will be used for personal use then you need to calculate the ratio of personal use (personal area/total area) and use that ratio to allocate expenses on Sch E. Personal expenses can not be deducted on Sch E. Your tax prep software may already have a worksheet to allocate the costs correctly.

[Gene V]

Add to the above--You should use Schedule C for Airbnb,

[Rapid Robert]

Add to the above--You should use Schedule C for Airbnb,

That's wrong. There is nothing about AirBnB that automatically makes a rental into a Schedule C activity. It is possible, perhaps even normal, to use AirBnB to rent a residence with no services provided whatsoever. In fact, AirBnB did not change any tax laws regarding rental activities, not even one little bit. The passive activity rules, and separately, the rules for whether or not an activity is subject to SE tax, still apply as always, although many never understood them correctly in the first place.

[Gene V]

I should rephrase my remarks--If substantial service is provided, then rental income and expenses are generally reported on Schedule C.
per TTB