Rental expense vs. cost of sale

[manbeing]

Tenant moved out on April 15,2018, and after that day, I put this rental property for sale on market.

There was a hole on the vinyl flooring that made by tenant, which I didn't repair, but buyer required me to repair after inspection, thus this kind of repair cost could either be treated as a rental expense (damage by tenant) or added to house basis (required fix by buyer). If I elect to report it as a rental expense, it will bring down my AIG towards 24% tax rate, while if I add it to house basis, it will reduce the long-term capital gain for a 15% tax rate, thus I should elect to report it as a rental expense. Am I right?

[CherylW · Accepted solution]

I think the difference here is the definition of repair and capital improvement.

A repair is necessary to keep your property in working condition.  If it was a hole that you had to repair, it probably would be classified as a repair or maintenance expense.

A capital improvement must be depreciated, and you can't depreciate property that you've held for less than a year.  Therefore, it must be a repair.

This, from the instructions for Form 4562, Depreciation and Amortization:

Exceptions. Qualified property does not include

• Listed property used 50% or less in a qualified business use (as defined in the instructions for lines 26 and 27);
• Any property required to be depreciated under the alternative depreciation system (ADS) (that is, not property for which you elected to use ADS);
• Property placed in service and disposed of in the same tax year;