When is a rental property considered out of service?

[johnmhtr]

This has come up because I had a rental property (single family residential condo) that was sold in 2022. The last tenant moved out on 08/31/2022 and the sale was closed on 11/21/2022. During that time the property was vacant, I did NOT use it for personal reasons.

Turbo Tax asks when the property was out of service or sold, as if they are the same. If I put in 08/31/22 then it lists the sale date as 08/31/22 on Form 4979, which is not correct. It acts as if I cannot have two different dates for out of service  and sold.

So my question is technically is it out of service on 11/21/2022? Is that the proper thing to do as far as the IRS is concerned.

Thanks in advance. I'm using TT Deluxe.

[MarilynG1]

If your last tenant moved out in August 2022 and you were no longer holding your property out for rent, you could indicate in TurboTax that you 'converted to personal use'  in the Property Profile section.  It is not unusual for a property to be taken off the rental market, then fixed up prior to selling it.  It doesn't mean that you lived there, it just means it was no longer a rental. 

Report the Sale Date in the Assets/Depreciation section.  Indicate that you 'rented all year' (meaning time it was available for rent).  Say Yes to 'Special Handling'.

Then in the Search area, type 'sale of business property' and click on the 'Jump to sale of business property' link.  EDIT Copy 1. 

If you made improvements to the property prior to sale, be sure to add them to the remaining Cost Basis when reporting the sale.  Enter the amount of Prior Depreciation TurboTax displayed for you in the Rental Section earlier. 

The sale is reported on Form 4797. 

If you lived in the home prior to renting it, you may be able to exclude all or part of your gain.  Here's more info on Excluding Gain on Sale of Rental Property. 

If you had a loss, here's details on Selling Rental Real Estate at a Loss. 

[johnmhtr]

I tried this and it creates a big mess and fills in areas with incorrect information.

For instance on Sch. E my repairs, depreciation, insurance do not show up at all, which is not correct.

It gave me a value for depreciation but it did not show up on line 18 of Sch. E.

On the Sch. E worksheet it put the depreciation in the Vacation Home Loss Limitation column.

It also put the insurance and repairs in that column.

Any ideas?

[johnmhtr]

OK, I think if figured out how to do this.

I just indicate in the Property Profile that I used it as a rental for 243 days (8 months), but say NO to personal use days.

Then YES to special handling. This lets me enter the correct sale date in the "sale of business property section"

Now I think everything is right, it puts all my expenses on Sch. E as it should.

Incidentally, should I pro-rate the taxes and HOA fees for the 8 months that it was rented?

[DawnC · Accepted solution]

Right, zero personal days should be entered.  And yes, you should pro-rate the expenses on Schedule E for the time the property was a rental.  The remainder of the real estate taxes can be deducted as a personal expense on Schedule A if you itemize, but not the HOA fees - only the rental portion of those fees are deductible. 

[Anonymous_]

See https://www.irs.gov/publications/p527#en_US_2022_publink1000219001

Vacant while listed for sale.

If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. If the property isn’t held out and available for rent while listed for sale, the expenses aren’t deductible rental expenses.

[johnmhtr]

So it is clear that when the property is no longer listed for rent, expenses (taxes, HOA fees, utilities etc.) cannot be claimed as rental expenses. Got it!

But, if the property is listed for sale or being prepared for sale after being removed from the rental market, are those expenses legitimate selling expenses and can they be claimed as such?

[Anonymous_]

@johnmhtr 

Just keep in mind that the property can be available for rent while it is listed for sale. This is not an uncommon scenario.

[johnmhtr]

Not sure if this answers my question.

In this case the rental property was out of service, ie. no longer available for rent. But it was being put on the market for sale. Meantime it was unoccupied and not being used.

[Anonymous_]

---

@johnmhtr wrote:

Not sure if this answers my question.

---

The answer to your question is, "No, you cannot deduct those (otherwise typical) rental expenses after the property is taken out of service and you cannot claim them as selling expenses".

[johnmhtr]

OK Thanks.