If a house is not rented out all year, vacant the entire year, and listed for sale, does it count as a rental or a second home?

[miller5050]

It was rented out last year, but I had no tenants this year and made improvements to make it more marketable.

[DS30 · Accepted solution]

It is still a rental property as long as it was available for rent during 2015 (the fact that it wasn't rented will not make it a personal use second home). You will just put "0" for question on "the days rented at FMV" if only available to rent but not rented. Please note that the days that you worked on the home as not considered personal use days. Your capital improvements will increase the basis in your property. (See additional information below if property was not available for rental for all of 2015.)

You will include all rental expenses under the rental section.

Please refer to this IRS link for more information on rental income and expenses:

https://www.irs.gov/publications/p527/ch01.html#en_US_2015_publink1000218984

To enter for rental income and expenses in TurboTax Online or Desktop, please follow these steps:

1. Once you are in your tax return, click on the “Federal Taxes” tab ("Business" tab in TurboTax Home & Business)
2. Next click on “Wages & Income” ("Business Income and Expense" in TurboTax Home & Business)
3. Next click on “I’ll choose what I work on” (Jump to full list)
4. Scroll down the screen until to come to the section “Rental Properties and Royalties”
5. Choose “Rental Properties and Royalties” and select “start’ (or “update” is you have already worked on this section)
6. If your rental property is listed, you will need to select "edit" to access this information. Otherwise enter your rental property information. (If you are entering your rental information for the first time, you will need to add the rental house as an asset. You will also enter your capital improvements as a separate asset)
7. Is This a Rental Property or Royalty? - choose rental and put rental information and address
8. What Type of Rental is This? - choose rental type (ie: Single family (home or unit where a single family lives))
9. Do Any of These Situations Apply to This Property? - select any that apply
10. Was This Property Rented for All of 2015? - based on your circumstances you will say no and but "0" for number of days rented at FMV. If you did not use the house for any personal use, put "0" for personal use days also.
11. Property Ownership - select your ownership percentage
12. Indicate if you Actively Participate - yes or no (If yes, this allows some of the passive losses to be used against passive income)
13. Did You Pay Anyone $600 or More for Work Related to This Property? - yes or no
14. Is Your Property in Any of These Designated Areas? - Usually "none of the above"
15. Review Your Rental Property Rental Summary (screenshot #1)
1. You select expenses to enter your mortgage interest and real estate taxes
2. You will select assets to include your capital improvements.

You will report your rental income and expense on Schedule E. If your expenses exceed your income, these expenses may be suspected due to the passive activity rules. However, according to the IRS, if your rental expenses exceed rental income you may report a loss up to $25,000 on your tax return, limited for adjusted gross incomes above $100,000.

TurboTax will help guide you on entering this information. Make sure that you pay close attention to the questions regarding at-risk issues and limitations.

For more information on rental income and expenses, including passive activity loss limits, refer to Publication 527 and Publication 925, Passive Activity and At-Risk Rules.

Please note if the property was not available for rent for all of 2015, you will not enter any expenses under the rental section. You would be able to get itemized deductions for mortgage interest and real estate taxes under Schedule A.

In this scenario, you would enter your mortgage interest and real estate taxes under deductions and credits:

To enter your Property Taxes in TurboTax Online or Desktop, please follow these steps:

1. Once you are in your tax return, click on the “Federal Taxes” tab ("Personal" tab in TurboTax Home & Business)
2. Next click on “Deductions and credits”
3. Next click on "jump to full list" or “I’ll choose what I work on”
4. Scroll down the screen until to come to the section “Your Home”
5. Choose "show more", then Property Taxes and follow the onscreen instructions
6. Enter the real estate taxes under "other property"

To enter your Mortgage Interest in TurboTax Online or Desktop, please follow these steps:

1. Once you are in your tax return, click on the “Federal Taxes” tab ("Personal" tab in TurboTax Home & Business)
2. Next click on “Deductions and credits”
3. Next click on "jump to full list" or “I’ll choose what I work on”
4. Scroll down the screen until to come to the section “Your Home”
5. Choose "show more", then Mortgage Interest and Refinancing and follow the onscreen instructions. You will need to enter the Mortgage lender's name and interest amount.

[miller5050]

Thank you! That was very helpful. In order to qualify as a rental does the house have to be available for rent for the entire year?

[DS30]

No. Just as long as it was available for rent during some part of the year.

[miller5050]

It definitely was. Thank you!

[crivers88]

Best response I have seen on this subject. Thanks!

[deck40]

Can anyone tell me if this answer is the same for my situation? We bought a house, lived in it for a year, moved and put in renters. They rented for 2 years and moved out. It was then put on the market and was on the market for over a year (approx 18 months) before it finally sold. We were never willing to rent it while it was on the market. But it also was not a house we lived in ever during that time. Do we list the sale of the house under Rental Property even though we were not renting it out and had no intension of doing so. Or, do we list it under Sale of Home?

[VictoriaD75]

If you were not marketing the home as a rental or attempting to rent it out, it is no longer a rental property. If you lived in it for 2 of the past 5 years, you may be eligible for the exclusion on the sale of a personal residence. However, you will still need to pay capital gains tax on the depreciation recapture from the rental period. 

Selling a Home

If you did not live in it for 2 of the last 5 years, it is considered an investment property related to the rental, even if it was not occupied for the last 18 months. It still was not your principal residence. 

[Carl]

It was then put on the market and was on the market for over a year (approx 18 months) before it finally sold.

The key thing here is that you "did not rent or attempt to rent" out the property after the last renter moved out. Therefore the property would be converted to personal use the day after the last renter moved out. This stops depreciation on all rental assets. Additionally, rental expenses incurred after that date are no longer deductible as rental expenses. But they "may" be property improvements or could possibly qualify as sales expenses - even if incurred in the tax year before you actually sold the property. It just depends on what the precise expense was for.

Based on your dates, you did not sell the property in the same tax year the last renter moved out. Therefore you would report the sale in the "sale of business property" section.

If you qualify for the "lived in two of last 5 years" capital gains exclusion, the "sale of business property" section will handle this just fine.

[sean2]

What if the rental was unavailable to rent due to flooding? I would assume you can't take the rental loss/deductions?

[DianeC958]

If the house is listed for sale it does not count as a rental it is an investment property or second home.

The reasons that house is not being rented do not matter, if the house is not available to rent then it is a second home or an investment property.

Yes, you are correct you cannot take a rental loss/deductions.  It you put money into the house to repair it, the amounts are added to your basis in the house and taken when you sell the house.

@sean2

[nsahay]

Thanks for your clarification in this situation.  If I understand you correctly, the late sale of the home resulted in not meeting the 2 out of 5 year criteria as house was "on sale" for 1.5 years and rented 2 years prior which is 3.5 years (so that max time it was used as primary residence is 1.5yrs out of the last 5).  This would disqualify the exemption and would require capital gains from the sale. 

I have something similar and although I did my best to sell the house to meet the 2/5 year primary residence requirement, due to unforeseen circumstances (COVID19), it took longer than expected resulting is over 1 year of empty home (not intended to be rented) taking away time such that I can only meet 1.5/5 year.  Is there a way to get partial exclusion in this case due to unforeseen event?   Many thanks!

[ZoeCalifornia]

Hi! You said in your previous reply "However, you will still need to pay capital gains tax on the depreciation recapture from the rental period."  How does one go about doing that on TurboTax?  I have a rental that we rented for 2 years (2020 and 2021) but in 2022 we won't be renting it and probably won't going forward after that. It's going to sit and family will use it when they visit. We'll keep it forever (not selling it). Or, maybe in a few years we'll rent it again... not sure.  But for 2022 and 2021 taxes, we took the depreciation using the straight line MACRS figure. How do I give that depreciation back?  Or do I?  Thanks!

[ThomasM125]

You don't need to do anything with the depreciation while you own the property and aren't renting it. If and when you sell the property, the depreciation allowed during the time the property was rented would be subtracted from the cost of the property to determine the gain on the sale of it. To the extent of the depreciation, the gain on sale of the property will be treated as ordinary income, as opposed to capital gain income.

@ZoeCalifornia

[ZoeCalifornia]

That's terrific, thank you!  So I'm guessing for the years we don't rent the property, we just don't take the depreciation (nor expenses), right?