Rental property put up for sale in 2016. Expenses incurred to prep for sale in 2016. Property sold in 2017. Can 2016 expenses be reported next year as part of sale?

[shrubber]

I bought the property for primary residence in 2004 and lived there until 2007.  I converted the property to rental in 2007 and it remained so until summer 2016.  I was active duty military until 2014.  We replaced an HVAC, upgraded the kitchen, and other repairs to prep for sale.  We put the property up for sale in fall 2016, but didn't sell it until March 2017.  We sold it at a simple loss, meaning we sold it for less than we paid for it before consideration of improvements or depreciation.

My question is whether the sale prep expenses incurred in 2016 can be reported as part of the sale on next year's taxes? 

[PatriciaV · Accepted solution]

It depends on the status of your Rental Property while you made repairs before it was sold.

If the property was available to be rented while you made repairs (even if you had listed the property for sale), you would report those costs (including mortgage interest) under Rental Expenses in the year that the costs were incurred.

However, if the property was not available to be rented (or you had no plans to rent it again), any repair costs you incurred would increase the basis of the property and should be entered as a separate Rental Asset (improvements), subject to depreciation, in the year you incurred the costs.

In this situation, the mortgage interest would be considered Investment Interest Expense. This is an Itemized Deduction on Schedule A.

Any repairs needed in order to close the sale may be included in Selling Expenses in the year of the sale.

When you report the sale, the adjusted basis of all Rental Assets (building and improvements) will be deducted from Sales Proceeds, as will any Selling Expenses. So if you capitalize your repairs this year, those costs will be included next year for the sale.

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Additional Information:

• IRS Pub 527 "Residential Rental Property"
• Where do I enter income and expenses from a rental property?
• How do I handle capital improvements and depreciation for my rental?
• TurboTax Tax Tip: What Are Deductible Investment Interest Expenses?