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The expense to improve is added to your cost for the property and will increase the depreciation.
Depreciation is started when the unit is available for rent. Although you cannot deduct them for 2016 it will increase your deduction for depreciation in 2017 when the rental is realized.
Your sister-in-law's use of the unit in exchange for childcare would not change the time or method.
If you were paying her as a household employee then you would need to report that (Schedule H) and pay your share of employer taxes on that.
Her staying there in exchange for a service is not rental to you but taxable income to her and further expense in employment taxes to her.
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