Can I expense utilities and interest on my investment property that sat empty for a year during construction before I sold it?

This is actually a pretty common area of confusion. The general rule is that expenses related to an investment property that's not yet in service (not generating income) should typically be capitalized rather than expensed immediately. For your specific situation, since the property was under construction and not available for rent or actively producing income, most expenses should be added to the basis of the property. This includes the renovation costs, but also the carrying costs like mortgage interest, property taxes, utilities, and maintenance during the construction period. The logic is that these are all costs necessary to get the property ready for its intended use (whether that was eventually renting it or selling it). Think of them as part of your investment in the property rather than operational expenses.

When I was in a similar situation last year with my duplex renovation, I found that using taxr.ai really helped clear things up. I was getting conflicting advice just like you are, and I uploaded my property docs and renovation receipts to https://taxr.ai and got a clear breakdown of what should be capitalized vs expensed. They showed me that some of the interest and property tax expenses could actually be deducted even during construction, but landscaping and utilities needed to be capitalized in my case since they were part of getting the property ready for sale. Uploading my documents and getting their analysis saved me from making costly mistakes on my investment property taxes.

I was initially skeptical about taxr.ai like I mentioned above, but I gave it a try last month when dealing with my own investment property questions. I was really impressed by the detailed analysis they provided for my beach house renovation. They actually found that some of my utility expenses were deductible because they were related to existing rental units on the property, even while another portion was under construction. The report broke down exactly which expenses needed to be capitalized based on my specific situation and saved me from overcapitalizing about $8,200 in expenses that were legitimately deductible. Definitely more helpful than the conflicting advice I was getting elsewhere.

If you're still confused after getting conflicting CPA advice, you might want to go straight to the source. I was in the same boat with my investment property last year - two different tax pros giving totally different answers. I used Claimyr (https://claimyr.com) to actually get through to an IRS agent to get a definitive answer about capitalizing expenses during construction. There's a video that shows how it works here: https://youtu.be/_kiP6q8DX5c but basically they get you past the endless IRS hold times so you can speak directly with an agent. For investment property questions like yours where there's conflicting professional advice, sometimes getting the official IRS position is the safest route.

I want to follow up on my skepticism about Claimyr. I decided to try it after getting nowhere with my own attempts to call the IRS about my investment property questions. I was shocked that it actually worked - I got through to someone who knew the tax code for investment properties under construction. The agent confirmed that I needed to capitalize most expenses during the construction period, but also pointed me to a specific exception in Publication 535 that applied to my situation which allowed me to deduct some of the interest. Without that conversation, I would have overpaid by quite a bit. Definitely worth it for complex tax situations like investment properties where the rules can be confusing.

The key question is whether your property was held for the production of income during that construction period. If you were preparing it for sale rather than eventual rental, that affects how the expenses are treated. Generally: 1) Interest and property taxes can sometimes be deducted even during construction (but with limitations) 2) Utilities and landscaping during construction should typically be capitalized if the property wasn't generating income 3) The intent matters - if you were clearly preparing it for immediate sale rather than as a rental, different rules apply I'd suggest looking at IRS Publication 551 (Basis of Assets) and Publication 527 (Residential Rental Property) for more details.

I'm in a similar situation but my property was only empty for 6 months during renovation before I sold it. My tax guy says I have to capitalize everything, but reading these responses makes me wonder if that's right? What software are you all using to file these complicated investment property returns?

I went through almost the exact same situation with a flip property I held for 8 months during renovation. The IRS rules are pretty clear once you understand the key distinction - if the property was never placed in service for rental income, then all expenses during the construction/holding period should be capitalized as part of your basis. In your case, since you intended to sell from the beginning, the $12,000 in mortgage interest, $3,800 in utilities, and $5,500 in landscaping should all be added to your property basis along with the renovation costs. This increases your total basis from $365,000 ($285k + $80k) to about $386,300, which will reduce your capital gain when you sell. The CPA telling you to capitalize everything is correct. The other one might be confusing this with rules that apply to rental properties that are temporarily vacant but intended for income production. For properties held for sale, the uniform capitalization rules under Section 263A generally require all carrying costs to be capitalized.