Investors & landlords

The questions will be answered as you asked them.

1. Can I add the costs of improvements regardless of value to my cost basis (adjusted cost basis)? Can I calculate my labor cost and add to cost basis? If so what is acceptable calculation for my labor cost?
   • Yes, any capital improvements (with more than a one year life) can be added to the inherited value.  Other expenses will be selling expenses. Unfortunately, the IRS and Congress believe your labor is worthless in this situation. You can add nothing for your labor.
2. How will I treat the closing costs I incur when I am calculating the capital gain or loss? I am using a realtor so the closing costs will include commission as well as various fees, property tax, doc stamps, etc. Also, how do I treat the monthly expenses I incur such as utilities and HOA fees until the property is sold?
   • Sales commissions, other closing costs mentioned will be part of your sales expenses at the time of sale.  The expenses for utilities, other upkeep expenses and the HOA fees are personal expenses and are not allowed to be used as a deduction.
3. How many months can he reflect the townhome as rental property? Not sure what the stipulations are around months where property is not rented due to repairs needed?
   • The townhome will be rental property on your father's final return until death even though it was temporarily vacant while repairs were being done until his death. On the date of death the property is no longer reported as a rental on his return.  If the property was temporarily vacant while repairs were being completed it could be considered as a rental on your return until it was sold if you had the intent to rent and it was advertised as such during the repair period. If not, then it will not be a rental on your return and it will be a sale of inherited property in 2023.
4. Answered in number 3. above.
5. My father's homestead property remained deeded in his trust for all of 2022. Even though he passed in August can I still deduct the property taxes that were paid in November 2022 on his 2022 tax return?
   • No.  The property taxes paid in 2022 after his death cannot be used as an expense on his final return.  They can be used on the estate return or on the return of the beneficiary as a second home.
6. My father's homestead property will be transferred to me in 2023 and remains vacant. It will take me some time to go through all the belongings and decide what to do with the property. How will I treat the property on my 2023 tax return and the expenses associated with it such as insurance, property taxes, utilities, repairs, etc.?
   • If I assume this is a separate property from the rental, it is personal expense to you for any miscellaneous repairs, utilities, insurance and any necessary upkeep expenses.  For any capital improvements (more than a one year expected life) you will add to the inherited value of the home and increase your cost basis for the sale.  This limits the capital gain on the future sale.  Likewise you will use selling expenses, commissions and other closing costs at the time of the sale. 

@Aussie