How to deduct the repairs to rental prior to selling?

[cottagecharm11]

I am including some background information with my question in case any of this is relevant to our situation. Our tenants stopped paying rent in February of 2020, blaming Covid. They separated and both stopped living in the house June 1st, leaving most of their possessions in the house. They refused to release possession to us in order to use our rental for free storage. They knew we were moving out of state and needed to sell the house. In August, we were advised by our attorney to post on the door, and mail an "Intent to Sell 60 day Notice"  which was one of only a few options to legally evict a tenant and regain possession of a  house in Washington state. The 60 days was up on Sept 30th. The tenants removed everything they wanted to keep, out of the house, and left us with a huge mess. The house was still full of their cast off possessions and garbage. The tenant still refused to surrender possession when I texted asking for a simple statement to that effect.  We filled out documents under the guidance of our lawyer to begin the eviction process on Sept. 16th. The process servers were unable to locate and serve the eviction documents to either tenant. To say our lawyer, who owns an eviction business, was not on the ball, is an understatement. He was not communicating with us at all. When we finally got an update from him, many months later, he decided instead of filing the eviction documents with the court it would be much faster if  we would post a "48 Hour Notice of Intent to Enter"  on the door. Then if there was no response from the tenants after the 48 hours was up we could go in and change the locks to legally retake possession of our house. The notice was posted by our real estate agent on 12.04.2020 as we live out of state. My husband arrived on 12.10.2020  to prepare the rental for sale. He spent at least a week working on the house. We then had to hire help to finish up the remaining work on the rental because he had to return to Oregon. The rental was listed on 01.14.2021. I am not sure how to handle all of the expenses considering the amount of time that transpired between the time we finally got possession of our rental back and the time we listed it. The two biggest expenses were for cleaning and clearing out, including labor it was $3000, and we spent over $700 in wall heaters, we ended up replacing them all since many of them had quit working.  Are the expenses incurred after we regained possession of the rental, tax deductible? If so, how do I treat them. Are the heater costs a repair or, do I add them as a capital improvement to the basis? The expenses will be in both the 2020 and 2021 tax year. 

[AmyC · Accepted solution]

Yes. You can deduct the amounts paid for repairs and maintenance. However, you cannot deduct the cost of improvements. Repairs and maintenance costs are those costs that keep the property in an ordinarily efficient operating condition. Examples are fixing a broken lock or painting a room.

In contrast, improvements are amounts paid to better or restore your property or adapt it to a new or different use. Examples of improvements are adding substantial insulation or replacing an entire HVAC system. Amounts paid to improve your property generally must be capitalized and depreciated from Instructions for Schedule E (Form 1040)

The wall heaters are affixed and feel more like restoration which would be depreciated. Since you are selling the house, you have the flexibility to determine how much to depreciate or to take in sec 179 deductions. When you sell the house, all of the depreciation will be deducted from the basis so it will be nice to have some assets to help balance that. When sold, you will mark each asset as sold for zero except the house. This will bring the rest of the deductions into your return.

For example: Restoration $4,000 for 2020. Depreciates $75. Then sell house and 2021 return mark asset sold and claim the other $3925 write off.