Rental property expenses same year as sale of property?

[dwpcep]

We owned a rental property from 2018 until May 7 of 2021, all utilities(electric, cable & water) were included.   We received rent for the months of Jan & Feb, our daughter was renting the property until her new home was finished (mid-March).  We told her not to worry about paying rent for the month of March.    After she moved out, we replaced all the flooring with vinyl plank & carpet.  We also continued to pay the utilities, did some cleaning, landscaping and painting.   How do I handle the flooring cost?   How do I handle the other deductions for utilities, cleaning etc?   Can I just list those Schedule E?

[ColeenD3]

During the time you had an active tenant paying rent, you can deduct expenses. The time period your daughter stayed there counted as personal use. For the time you spent remodeling, since it was not ready and available to rent, the expenses are not deductible.

The improvement is depreciated over 27.5 years and is a new asset.

[dwpcep]

Our daughter was the tenant and paid rent for 2 years.   My question pertained to the sale of the property.   Do I subtract the flooring cost from the basis and list the other expenses as misc?  

Thanks,

[LeonardS]

If the flooring was a capital improvement you will add the cost of the flooring to the basis of the rental property.  The flooring is a capital improvement if it is hardwood, tile, vinyl, and glued-down carpet.

The other expenses were incurred in preparing the property for sale when the property was not available for rent as @ColeenD3 stated in her reply those expenses are not deductible as an expense.

[dwpcep]

Yes the flooring was a capital improvement.   Where and how do I add this cost in Turbo Tax?    Which screen?  So I can't add the painting and various repair expenses to the basis since they are not capital improvements?

[JillS56]

It depends.   The IRS defines improvements as expenses that add to the value of the property, prolong its useful life, or adapt it to new uses. There’s obviously some gray area here. But examples will help clear it up a bit. 

The IRS says the following can be included as basis-increasing improvements:

• Additions: If you add an extra bedroom or bathroom, put a deck on the back of the home, add a garage, or construct a porch or patio, you've added value to the home.
• Lawn and grounds improvements: Value-adding landscaping projects, driveway or walkway construction, building a fence or retaining wall, and adding a swimming pool can qualify as property improvements.
• Exterior improvements: New windows, a new roof, and new siding are examples.
• Insulation: This includes insulation in the attic, inside walls, under floors, or around pipes and ductwork.
• Systems: Installing a new heating or air conditioning system, new ductwork, adding a central vacuuming system, wiring improvements, installing a security system, and putting in lawn irrigation are improvements.
• Plumbing: Installing a septic system, water heater, or soft water system adds value.
• Interior improvements: New appliances certainly increase the value and extend the useful life of the property, as do kitchen renovations, new flooring/carpeting, and the installation of a fireplace.

This isn’t an exhaustive list.

The painting and various repairs (if they do not fall into one of the above categories) are not defined as improvements but can be deducted as expenses.   

IRS PUBLICATION 527

IRS Tangible Property

[dwpcep]

Other posters have stated that the repairs/cleaning/maintenance expenses can't be expensed after my renter moved out (March).  We sold in early May.  Also, could I just list the flooring as an expense, since it happened in the same year?

[Carl]

Just to clarify some things. It's particularly noteworthy that you were renting to family. So this very well may matter, depending on if you were charging her FMRV or renting to her below FMRV.

The time period your daughter stayed there counted as personal use

Assuming she was paying FMRV, only the period of time for which she was living there and did not pay rent, is personal use days.

Do I subtract the flooring cost from the basis

No. The flooring and any other property improvements are added in the assets/depreciation section, classified as residential rental real estate and set up for depreciation for the next 27.5 years. (Even though you sold the property.)  You'll enter what you paid in the COST box, and enter zero in the COST OF LAND box. The in service date will be the date you closed on the sale. (This keeps depreciation at zero, or extremely low in an amount that won't really make any difference.)

and list the other expenses as misc?

If you did not rent or attempt to rent the property after your daughter moved out and before the closing date of the sale, then you need to convert the property to personal use effective one day after your daughter moved out, or one day after the rent (that she didn't pay) was due. I would suggest you convert one day after the March rent was due, so that you don't have to deal with reporting any personal use days.

Expenses incurred after converting to personal use are not deductible on the SCH E. Period.

Of course, property improvements still add to the cost basis (not subtract from it) so those get entered in the assets/depreciation section as suggested above.

So I can't add the painting and various repair expenses to the basis since they are not capital improvements?

No, you can't. But was painting "a part of" a property improvement?

Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3^rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

Any utility costs incurred after the last renter moved out are just not deductible at all on the SCH E. (Assuming you do as recommended and convert the property to personal use since you did not rent or attempt to rent the property after the daughter moved out. )

[DavidD66]

It sounds like after your daughter moved out, you were not renting or attempting to rent the property.  Instead, it you began getting it ready to sell; therefore, it ceased to be a rental property.  I would add all the costs (flooring, painting, cleaning, etc.) to your basis in the property.

[DiddlyD]

If they bought it, rented it, never occupied it and sold it, they did not covert it to owner occupied prior to the sale and would be technically mis-reporting the disposition of the property.