Investors & landlords

So let’s see if I understand the advice that has been given so far (and thank you!).

Just to recap my situation:

- I owned a rental property in 2022 and rented it out for just the first 99 days of the year, through 4/9/22.

- After the last tenant moved out on 4/9/22, I did a complete remodel over the remainder of 2022.

- I listed the unit for sale in November 2022 and sold it (closed) on 1/10/23.

- The unit was fully depreciated as of 3/17/15. (It was a rental for almost 30 years.)

Based on what I’ve read here, my entries into TT 2022 should be as follows:

- All capital improvements that I made in 2022 must be added to my cost basis.

- Expenses that I incurred while the property was being rented (first 99 days of 2022) should be listed on my 2022 Schedule E, as usual.

- Property Tax, Mortgage Interest, and Insurance that I paid AFTER the last tenant moved out should be deducted on my 2022 Schedule A (Itemized Deductions).

Now here’s where I’m confused…

In addition to the expenses that I mentioned above, I had about $8,000 of other expenses, which I paid via my co-op’s HOA fees during the remodeling phase . This covered non-capitalizable, non-property tax, non-mortgage interest items such as building maintenance and staff salaries. (As a side note, the $8,000 portion is less than half of my annual $19,000 HOA fee, which includes my prorated share of property taxes, mortgage interest on the building’s underlying $24 million loan, building insurance, heat, hot & cold water, building maintenance, staff salaries – everything except my unit’s electric bill.) The big question is: On which form(s) does that $8,000 portion of my HOA fees get entered in TT 2022?

Based on the previous replies, it looks like Section 212 allows me to deduct that $8,000 of expenses because they were “…ordinary and necessary expenses paid or incurred in the management, conservation, or maintenance of a building devoted to rental purposes,” even though I did not collect rent for the full taxable year. (I should also mention that my co-op requires a minimum 1-year lease term, meaning that I never had the option of renting it out for just a few months, even if I had wanted to, since my intention was to remodel and then sell the unit.)

Further, the term income for the purpose of section 212 “…includes not merely income of the taxable year but also income which the taxpayer has realized in a prior taxable year or may realize in subsequent taxable years; and is not confined to recurring income but applies as well to gains from the disposition of property.”

So Section 212 seems to be saying that I can deduct these expenses for maintaining the investment property that I eventually sold in 2023, even though I didn’t collect rent during the remodeling phase in 2022.

QUESTION #1:

On which form(s) would the $8,000 portion of my HOA fees get entered in TT 2022? (If forms require it, I can show a breakdown for building maintenance, staff salaries, etc., based on our co-op’s annual financial statements.)

QUESTION #2:

I am confused about something that @Carl said earlier. He wrote:

I say just convert it to personal use on the 2022 tax return and be done with it. Otherwise, if you report it on the 2023 tax return, you'll still need to convert it to personal use with a conversion date that is the closing date of the sale so you can get the correct amount of depreciation to recapture when you report the sale in the Sale of Business Property section.

Since I didn’t use the unit for personal use at any time in the last 30 years, I’m assuming that I would NOT convert it to personal use on my 2022 tax return. If I have this wrong, can you please explain why I would do this, and the steps to “convert it to personal use” in TT 2022?

For reference, below are the links to Section 212 that @tagteam and @Carl provided:

Section 212:  See https://www.law.cornell.edu/uscode/text/26/212

Section 212:  See also https://www.law.cornell.edu/cfr/text/26/1.212-1