Rehab Expenses for Rental Property Prior to Sale

[ozzy032]

I had a rental property in 2023 that I stopped renting at the end of September. During October, November, and December I did some major repairs like a new roof, foundation repair, trim and siding repair, exterior paint, gutter replacement, and interior paint. I paid the 2023 property taxes in January 2024 and listed the home for sale in January as well. The closing of the sale happened in Feb 2024. How am I supposed to account for all these rehab expenses in 2023? Do they get added to the properties basis and depreciated over the last few months of the year? Or are they considered selling expenses and get added to the basis of the property for calculating capital gains tax on my 2024 taxes with no depreciation in 2023? And what about the 2023 property taxes paid in January 2024? Should I pro-rate them (75% against rental income and 25% as holding cost added to basis) I have other misc expenses as well that were incurred during the rehab like travel and utilities. What do I do with those?

[PaulaM]

Indicate in the property's asset/depreciation section that you stopped using the property in business along with the date. This will stop depreciation at that point. Continue on to confirm depreciation amounts for recapture and calculate any remaining depreciation for the year. Do this for each asset you have listed. Be sure to save all the worksheets for next year's recording of the sale. 

The property taxes are a deduction from rental income up to the 75% and the remaining 25% is now a personal expense of a second home. You can deduct that portion on your Schedule A if you itemize your deductions.

The rehab expenses you had in 2023/2024 adjust your basis and comes into play next tax season when you record the sale of the business property in 2024. These are not selling expenses.

[ozzy032]

Can you clarify why property taxes on an investment property would be considered personal expenses and deducted only on Schedule A? I would assume property taxes, utilities, insurance, and all other holding costs incurred while upgrading the property to prepare for the sale would be added to the basis of the property. I'm referring to them as "selling expenses" because actual selling expenses like agent commissions, closing costs, title insurance, etc. are added to the basis in the exact same manner for calculating the capital gain.

Also, how do I deduct 75% of the property taxes against the 2023 rental income if the expense wasn't paid until January 2024? If I can't deduct them on 2023 taxes, then next year, when doing taxes for 2024, how do I account for the property taxes? Do they just get added to the basis as well? Thx

[PatriciaV]

As a cash-basis taxpayer, the property taxes you paid in January 2024 are deducted in the year you paid them. Also, a property held for sale (no longer offered for rent) is considered to be a "second home." Property taxes for a second home are reported on Schedule A.

With regard to selling expenses: Any repairs needed in order to close the sale may be included in Selling Expenses. Here is a list that may also be helpful: IRS FAQ: Rental Closing Costs

For reference: IRS Pub 527 - Vacant Property:

Vacant while listed for sale.

"If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. If the property isn’t held out and available for rent while listed for sale, the expenses aren’t deductible rental expenses."