Rental property rented for 5 months, rest of the year was for sale (vacant). Do I split the costs (interest, taxes) between rental property SCHEDULE E and DEDUCTIONS?

[Ed--C]

I have a Rental property and was rented for 5 months (Jan-May), the rest of the year was for vacant and for sale. Do I need to split the costs (e.g. interest, taxes) between rental property SCHEDULE E and DEDUCTIONS?

[Hiker31]

What about depreciation? Mine was my primary home for 2.5/5 yrs, rented 3 months in 2016, vacant for 5+ months, sold in Sept 2016.  Are all utilities, insurance, taxes reported on Sch E for all 9 months, and is depreciation for 9 months or 3 months?

[ChelsiE2 · Accepted solution]

If you did not use this home as a second home or vacation rental and it did in fact just sit empty and available for sale, then go ahead and deduct all expenses related to the property on Schedule E.

Note: If you used the home at all as a second home or vacation property, then you would need to split between Schedule E and Itemized Deductions.

[Ed--C]

Thanks ChelsiE. It did in fact just sit empty and still is on the market. I am asking because I had a big loss on Schedule E because it was sitting empty for 7 months. However, since the jointly yearly wage is 150k, I can't deduct the loss. If I split the expenses between Schedule E (5 months of the expenses) and Itemized Deduction (7 months of expenses), I have a smaller loss in Schedule E but I can deduct the rest on Itemized Deductions. I wonder if in this case the splitting is applicable. Thanks.

[ChelsiE2]

@Ed. C If you code the Rental Property as "disposed of" in 2015, then you should be able to take your entire Passive Loss this year (to include all 12 months of Rental Property expenses).  Even if you haven't sold the property yet, you can still say it's disposed of if you do not plan on ever renting it out again.  Let me know if that works for you of if you need help with the "disposed of" input.

[Ed--C]

Thanks Chelsea, we sold the house last week and in fact as I explained before was sitting on the market for the last 7 months of 2015 and all 2016 up to the selling date (last week). I will go ahead and code it as disposed of in 2015. Quick question: the 2.5 months it was sitting this year and for all the interests/losses I had for the three months, I need to report it on next year's taxes right? Can I include closing costs contribution to the buyer and realtor expenses too next year? In which form does these expenses go next year since I "disposed of" in 2015? Thanks a lot for your advice.

[Ed--C]

Another question for the "disposed of" input: I filled all the information in my rental income/expenses and clicked "disposed of" in the box. When I go to the sale of property/depreciation section, I have one question: Did you stop using this asset in 2015? I click Yes, since I reported as disposed of in 2015, then is asking me the date of disposition: should I enter the date when I stopped renting it and put it on the market for sale? Please let me know, the depreciation changes based on this input. Please let me know if this is the correct way to do it? Is this all the information required when I disposed of?

[ChelsiE2]

@Ed. C

The question I need to ask you (which I should have clarified originally, and I apologize for not doing so) is:  Was this property available for rent during the time you had it available for sale?  Or had you taken it off of the rental market once you listed it for sale?

[Ed--C]

It was taken off the rental market

[ChelsiE2]

@Ed. C Technically, you will need to mark this property disposed of on the date you took it off of the rental market.  You will need to allocate the mortgage interest and real estate taxes between the period you rented the home and the period you had it taken off the rental market.  

- During time rented, deduct on Schedule E.
- During time off rental market, deduct on Schedule A as follows:
     >If you do not own a second home that you already deduct: mortgage interest and taxes both deducted same as your primary residence.
     >If you do own a second home that you deduct on Schedule A: mortgage interest is deductible as Investment Interest Expense and real estate taxes are deducted same as primary residence.

For 2016, deduct these expenses the same as you did during the period of 2015 where property was not available for rent.

The depreciation changes you listed above are correct.  It would stop depreciation on the date you stop listing it as available for rent.  

For 2016, you will need to report the sale of this property and include the amounts of your total accumulated depreciation taken through the life of the rental property.  You will also be able to deduct the selling expenses you listed above (i.e. realtor commission, closing costs) when computing your gain on the sale.

[Ed--C]

Thanks a lot for your help. One quick question so I can understand the differences: If hypothetically, alternatively  the property was available for rent during the time I had it available for sale. Then, I would have deduct in Schedule E only right ? In that case, could I also select the box as "dispose of" if at the end was sold and not rented at all?

[ChelsiE2]

@Ed. C You are correct.  If the home was "available for rent" the entire time it was held for sale, then yes, all expenses would remain on Schedule E and it would be depreciated through the point of sale.  You would also not select this property was disposed of until the actual date it was sold.

[Ed--C]

Thanks I really appreciate your help. I believe I understand it quite better now. This topic is confusing and should be simplified in the tax code. In theory, someone that knows better could have kept it for sale and rental for the entire year, if it did not rent nor sale, then on December 30th decide to take it out of rental (dispose of). All the losses including depreciation for the year would have been deducted in Schedule E, except for that 1 day. They would have then be allowed to select "dispose of" for that year as well. On the following year (2016), then was sitting on the market for sale only, until the date of sale. Then for 2016, if the house sold, report the sale of the property and related expenses on Schedule A.