Improvements/repairs to rental property prior to sale

[dlanigan4]

I have a rental property which I leased out for 9 months (Jan - Sep) of 2016.  The tenants moved out (30 Sep) and I spent the next ~2 months making repairs to prepare the house for sale ($4500 for new carpet, $1350 to fix a brick patio, $1850 paint, $230 in yardwork, and miscellaneous expenses for cleaning supplies, furnace annual check, carbon monoxide detectors, etc.) .  The house was listed for sale in December and went under contract in January.

I have read information stating that some items are improvements (added to cost basis of house) and some items are repair (deduction?).  Making matters more complicated is that I just sold the house in March 2017 after making more repairs ($1100 radon reduction installation, $370 plumbing repair) in 2017.

Should I list all expenses in their appropriate year and how should I categorise the expenses?

[AnnetteB · Accepted solution]

Unless you continued to advertise and hold the property available for rent after the tenants moved out, it ceased to be a rental property between that time and when it was sold. 

If it is no longer a rental property, the expenses that you incurred are personal expenses and not rental expenses.  The improvements that you made to the property would be added to the basis and would be taken into account on your 2017 tax return when you report the sale of the property.  The expenses for repairs or supplies are personal expenses and would not be deducted or added to the basis. 

If the property did continue to be a rental property, then you would claim the repairs and supplies as an expense on Schedule E for the year in which they were paid.  Improvements would be entered as a depreciable asset (carpet for example) placed in service when they were installed. 

[dlanigan4]

Thanks, Annette B. I did not advertise the home as a rental after the tenants moved out.
So is only the installation of new carpet considered an "improvement" whilst all other expenses (repairing of brick patio, landscaping, painting, plumbing repair, cleaning supplies) are considered "repairs" for the non-rental. Is that correct?
Do you know the category for the radon mitigation system?

[AnnetteB]

Considering the things you mentioned and how they would have been claimed if the property were still a rental property, most would be considered an expense and not something you would depreciate.  I am not familiar with radon mitigation systems -- if it is something installed and integrated into the house (like a central A/C unit would be for example), then it would be an improvement.  Depending on how extensive the brick patio work was, it may be an improvement.  Painting would be a "repair" because you would not depreciate it as an improvement if the property were still a rental.

[numkrunch]

When you say the expenses are personal and not rental expenses, this means they would not be placed on the tax return anywhere, correct?  Also, similarly to the questioner above, we installed carpet after our last tenant, right before the sale.  The unit was not advertised as a rental at that point, but as a property for sale.  Are you saying the carpet should still be depreciated?

[AnnetteB]

Correct, personal expenses would not be included on the tax return.  The carpet would have been depreciated if the property were still a rental, but since it was not, add the cost of the carpet to the basis for the property.

[numkrunch]

Can you tell me the exact place and method to add the cost to the basis? What screen, what field, etc...

[pbarto]

what screen to report capital improvements before a rental property is ready to rent and after a property is taken off rental market and improved before sale cannot be found

[Fxsts12]

After the property is no longer a rental "point established as held for sale" all rental expenses end. ALL new costs incurred will be EITHER added to the basis (aggregated), improvements OR included as expense for sale. There are NO PERSONAL expenses on a property for sale. All are deductible, the difference is where they are accounted for. Form 4797 Part I line 2 (f) "Cost or other basis, plus improvements, and expense of sale "groups" these together and has the same net effect (no change to how it is taxed). *Disclaimer-I am not a CPA, 

[QIronbane]

Hi You mentioned that "The improvements that you made to the property would be added to the basis and would be taken into account on your tax return when you report the sale of the property."  Regarding these improvement (made to prepare for the sale of rental property), where do I add them to the basis? is the Cost field (under the "Review Information" of assets, which also includes the Date when the assets was acquired & Land)?

[Carl]

Captial improvements done after the last renter moved out and before the property was sold, are entered in the assets/depreciation section. However, since the capital improvement was "never" place in service, you have to enter it a bit differently so that it does not get depreciated, yet still adds to the cost basis of the property.

What you have to do is classify the improvement as "rental real estate". Then enter the amount you paid for that improvement in the COST box, and the same exact amount in the "COST OF LAND" box. Since land is not depreciated, that will cause the program to "NOT" take any depreciation regardless of what you enter for your "in service" date.

Just make sure you describe the asset for what it really is. Then since the program will "force" you to enter an in service date, just make that date the date of your closing on the sale.

[Carl]

Oh one more thing. For business use percentage I don't think the program will allow a zero percent business use. But I think it will allow 0.1 or 1% business use. So don't leave that business use percentage at 100% since it was never placed in service.

[QIronbane]

Thank you Carl! Your idea of classifying  the cost of the getting rental property ready for sale as "rental real estate" is great. There is another way to offset this cost is add this cost as the Miscellaneous Expenses in the year when the rental property was sold. Many people do that. I assume the results are the same. Between these methods, which one is a better one (more professional, compliant to IRB rules, etc.)? 

[QIronbane]

Hi Carl, Another thing in regard to this "Rental Real Estate" asset is that I will need to have it "sold" in the sale of the rental property. But somehow Turbo Tax does not give you the option of having this assets sold after adding it. You have the option to have all other assets sold. Pretty Strange?

[Carl]

Yes it does. You just have to know "the secret" which is in plain site. 🙂 I missed it my first time too.

On the Assets/Depreciation screen click the "Add an Asset" button.

Select Rental Real Estate Property and continue.

Select Residential Rental Real Estate and continue.

Enter your description of the asset.

Enter what you paid for the asset in the COST box.

Enter the "same exact amount" in the "cost of land" box.

Date purchased or acquired needs to be a date in 2019.

Click Continue.

Select "I purchased the asset new"  *****AND***** select "The item was sold, retired, stolen, destroyed, ......"

For "Date you sold/retired it from use" enter the closing date of your sale.

Then below that select that the item was used 100% for business. (Business use percentage of 100% won't matter, as there will be ZERO depreciation anyway.)

For "Enter the date that you started using it for business" enter the closing date of your sale.

Click Continue.

If asked about the Special Depreciation Allowance, select No and continue.

On the "Special Handling Required?" screen you *must* select no.

Now continue working it through and you will be asked for sales information on the asset.

On the sales data entry screen, leave the "asset sales price" and "asset sales expenses" totally blank. Not even a zero in either of those boxes.

Enter your sales price of this asset in the "Land Sales Price" box, and your sales expenses for this asset in the "Land Sales Expenses" box.

Just FYI, when sold at a gain I just enter my total sales expenses on the screen for the main property, provided the difference between the sales price of the main property and sales expenses, still show a gain. Then I leave the sales expenses for all other assets blank.

Remember, when selling at a gain, you "must" show a gain on each individual asset listed. Even if that gain is only $1 on some assets. LIkewise, if sold at a loss then you "must" show a loss on each individual asset listed - even if that loss is only $1 on some assets. This is because is some cases (not all cases) the TurboTax program just can't correctly deal with the depreciation recapture on SCH D when you have a loss on some assets, and a gain on others.