Allocation of asset created to account for expenses incurred selling a rental property

[23bambam23]

Is there any clarification on whether a property is considered available to rent during the time it is being cleaned/repaired for sale?  In my case the tenant moved out in Dec. 2020 and we spent some time in Jan and Feb 2021 fixing up the house before listing it in Feb 2021.  It sold in March 2021.  It’s my understanding that cleaning/repair expenses we incurred in Jan and Feb need to captured on an asset listed on the “Your Property Assets” page if the property is not available to rent; how exactly is this determined?

If I create an asset to account for the repair and cleaning expenses incurred just prior to selling the rental, do I need to include this asset with all the other property assets when allocating the structure sales price for the rental property?

If I should add these expenses to my basis instead of creating an asset, what is the best way to do this in Turbotax?

[Carl]

If you listed the property as "for sale or rent", then you could claim cleaning/maintenance/repair expenses on SCH E. Otherwise, the property is converted to personal use one day after the last renter moved out to stop depreciation, and any expenses incurred after the conversion are just flat out not deductible on SCH E.

A fair number of those expenses can be included in the sales expenses total.  See page 16 of IRS Publication 523 at https://www.irs.gov/pub/irs-pdf/p523.pdf starting at the section "Reporting Deductions Related to Your Home Sale"  That list is not all inclusive either.

[23bambam23]

Thanks so much for your prompt response, Carl.  To clarify, as we may also sell another rental this year, could you tell me if I do create an asset to account for cleaning, etc. expenses incurred prior to selling the rental (and assuming the property was offered for rent), do I need to include this asset with all the other property assets when allocating the structure sales price for the rental?

[Carl]

To clarify, as we may also sell another rental this year, could you tell me if I do create an asset to account for cleaning, etc. expenses incurred prior to selling the rental (and assuming the property was offered for rent),

No.  Just..... no. Expenses incurred while the property is "in service" are rental expenses - not assets. No exceptions here. Generally speaking there are two types of assets when it comes to rental property.

- Depreciated asset: Something physical that you can actually see and touch and is used in the production of income. It gets depreciated over time and that depreciation is recaptured and taxed in the tax year you sell the property. So it's important to realize that depreciation is "NOT" a permanent deduction.

- Amortized asset. Generally, this is something intangible. You can't "see" it, you can't "touch" it. Financing or refinancing fees are the primary amortized assets associated with rental property. An amortized asset is deducted (not depreciated) over time. For example, if you refinance the property, all costs associated with acquisition of the loan are deductible (not depreciated) over the life of the loan; commonly 15 years or 30 years. This cost would be a permanent deduction. If the property is sold before this cost is fully deducted, then whatever remains to be deducted in the tax year of the sale, is fully deductible in that tax year of the sale.

Now I looked, and I can't find the specific IRS publication that lists all the items that can be included in sales expenses for a rental property. I do know that list is different from what you can claim as a sales expense when selling your personal residence or 2nd home. If I knew the specific IRS PUB number off the top of my head, that would make it simpler though. I already looked through (briefly) IRS Pub 527 for residential rental property and IRS Pub 523 for selling your home. But I'm not seeing what I'm looking for so far, in either of those documents.

Also keep in mind that when you list a property as "for sale or rent" and you sell it, then deduct expenses on SCH E, if you're audited on it (unlikely, but not impossible) you may need to "prove" you were preparing the property for rent, and not just preparing it to sell. Generally, if your sales advert clearly states "for sale or rent", that's enough, provided you don't reject a prospective renter on the basis that you only want to sell, and not rent it out again. That's an are where detailed documentation can come into play, thus saving your butt during an audit in the future.