Expenses of unsold investment property

[rt3378]

I bought a property in 2018.  I have not rented it and have been making improvements on it while also trying to sell it.  As of this date, it still has not sold.  Am I allowed to deduct expenses such as cleaning/maintenance, insurance, mortgage interest, repairs, taxes, and utilities?  Would these deductions be deducted from my ordinary income since I have no rental income? 

[DanielV01 · Accepted solution]

It depends, but you likely have nothing to deduct until you sell.  The main factor is that it seems you have not attempted to rent the property, and you purchased it as an investment.  Most investments are subject to Capital Gains treatment.  Under this provision, your expenses related to your property are considered adjustments to basis, which will have the effect of reducing the gain (or even contributing to loss).  If you bought the property as a pure investment (no rental, and not purchased to be a primary home), then you do not claim any expenses when they are incurred on the tax return.  Rather, you add all of them up and total with the amount paid for the property (plus taxes and other closing or related fees).  That total is subtracted from the eventual sales price to determine gain or loss.  The character of the gain (short or long term) will be determined then by the original purchase date.

However, if you are in the business of flipping houses (which usually is the case if you are working on more than one investment property to improve/restore and sell), it is not considered to be capital gains but rather self-employment.  In this case, the house itself and the related repairs go to inventory, which then is "cashed in" when the house is sold.  Maintenance expenses (such as cleaning and utilities you pay) could be deducted on Schedule C if the house does not sell in the year. (which would produce an amount of loss that reduces ordinary income).  However, keep in mind that this would also produce additional self-employment profit which is subject to self-employment taxes  (essentially Social Security and Medicare payments).  

If you actually rent the property (or make it available for rent), then it falls under rental income rules.  Expenses incurred prior to being available for rent are totalled and capitalized for depreciation as the property's basis, and expenses incurred after being available for rent are deducted against rental income.  If a loss is produced, you can claim loss subject to Passive Activity Rules (which are income driven).  

This is a high-level review.  If you have specific questions related to your situation, feel free to ask them.  Please do not provide any personal information in this Forum, however.

[aawhite]

After probate closed  in 2018, we inherited a property.

The FMV at the date of death in 2017 has been determined.

It is not a rental since it needs repairs.

It has carrying costs (utilities, insurance, HOA fees) in preparation to sell.

It is not a second home, and thus it is a investment property. 

So when the investment property sells in 2020,

can the costs of repairs (paint, carpet, dry rot repair, etc)

and the carrying costs (HOA fees, utilities, insurance), for each year, after probate closed in 2018,

be added to the date of death FMV, as the new adjusted basis, when we file our tax return in 2021? 

[Sandy224]

Just want to be sure I've got this clear.

In 2002 we purchased a house for our son and his family to live in.  He paid us a moderate amount of rent, but it did not cover the mortgage, insurance and taxes so there was never any gain.  In 2008, he stopped paying rent but continued to live there until 2019.  I sold it in 2020. 

While we owned it, we made several improvements (furnace, windows, foundation work)

We have never used it in any way on our tax return.  We have never "made" any money on it, but also, have never claimed any kind of a loss.  We did include the taxes paid on the tax returns.

How do I treat it on the return this year now that it's sold?

[MaryK4]

You will have to enter as the sale of a second home.  See Where do I enter the sale of a second home?

According to the IRS, a property is considered a personal residence if the owner or certain family members use it for personal use for 14 days or 10 percent of the days it is rented out. Additionally, if the property is rented to anyone, related or unrelated, for less than fair market rate, it will be considered a personal residence.  This is especially problematic for people who take the Rental Property deductions, but since you did not, there will be fewer issues with the sale.

You will be able to use the improvements you made to increase the adjusted basis which will help reduce the tax you will have to pay.  If you have any other questions, please post again.

@Sandy224