Rental Property Listed for Sale in 2019, Sold in 2020

[blanco112]

Hello, 

I have a rental property that I listed for sale in 2019 (it's been rented since 2009). Due to terms agreed to with my tenant, they moved out in September but paid through November 5. Between moving out and November, we had to complete some repairs due to damage (new floors, shampoo rugs) which were partially covered by the security deposit (he moved out of state and since he paid rent for a few months I didn't pursue to difference). This property was sold in March 2020. Never listed for rent nor rented since going on the market in November. What is the best way to handle this for 2019 while also not creating a headache for myself for 2020 when the unit was sold?

I assume I list the days rented through November 5, personal use days 0? Are the repairs deductible since they were paid for by the security deposit, which I'm including as Income? 

Thanks,

Wil

[Critter]

I assume I list the days rented through November 5, personal use days 0?  Correct

Are the repairs deductible since they were paid for by the security deposit, which I'm including as Income?  Correct 

What is the best way to handle this for 2019 while also not creating a headache for myself for 2020 when the unit was sold?   HINT ... it will remain a 2019 rental ... do not mention it was sold on the 2019 return.

Then on the 2020 return you MUST enter 1 day of rental use & 0 personal use for the program to handle the sale correctly and with the least amount of errors. 

[Carl]

What is the best way to handle this for 2019 while also not creating a headache for myself for 2020 when the unit was sold?

Do not convert the property to personal use. Leave it classified as residential rental real estate. This makes it simple to deduct your repair expenses as rental expenses. Repairs paid for in 2019 would be deducted as such on your 2019 return. Repairs paid in 2020 would of course be deducted on the 2020 return next year. While shampooing the carpets is a maintenance/repair expense,  the "new floors" might not be a maintenance/repair expense. That might be a property improvement. But it depends on exactly what you mean by "new floors". So you'll need to elaborate on that.

Now there are going to be those who will say something along the lines of *you have to convert it to personal use because....." and technically from a legal standpoint they're not wrong. But I view it like this:

If I owned a SCH C brick and mortar business and closed the doors permanently and forever for that business in Nov of 2019, then sold it in 2020, I am not going to convert the building to personal use between the time I closed the business and then sold it.I'm selling the business, and will report it as the sale of a business.

Rental property is a business too. When I decide to no longer rent it out and sell the property, and I actually do sell it within a reasonable amount of time after the last renter gets moved out, I'm still selling rental property.

Besides, it's not like the IRS is going to single you out among the tens of thousands (if not more than a million) rental property owners that sold their rental property in 2019 or 2020, unless you give them a reason to single you out.

Since there's no question the property was rental through the end of November (since rent was paid for that month) leaving it classified as such until yo sold it will only result in 4-5 months of depreciation. Based on the the total depreciation already taken on the property I seriously doubt it's going to make enough difference in your tax liability to make the conversion headache worth it.

Now if this was a case where the last renter moved out in say, April of 2019 or earlier and you didn't sell it until 2020, then I"d say convert it to personal use on the 2019 tax return. Then on the 2020 tax return you'd report it as the sale of a 2nd home that had prior business use. That's a PITA. But keeping it as a vacant rental for 8 months or more prior to the sale may raise flags. I don't know for a fact that it would though.

[blanco112]

Thanks for your response! 

Re: While shampooing the carpets is a maintenance/repair expense,  the "new floors" might not be a maintenance/repair expense. That might be a property improvement. But it depends on exactly what you mean by "new floors". So you'll need to elaborate on that.

The old floor was damage by some staining from the prior owner's table in a distinct ring match the table's shape. Not normal wear and tear and it would not have needed to be replaced had it not been damaged. We tried various ways to clean it including seeking a professional opinion and could not. So we replaced the floors with something similar in order to bring it back to a reasonable state. Also, even though we put it up for sale, it was also always a possibility that if I wasn't getting traction it would be rented again and I'd never have been able to rent it without fixing the floor. 

[Carl]

By elaborate on the floors, I should probably have been more specific. If this was carpet, and you paid less than $2,500 for this, just expense it as a repair/maintenance expense. If these were wood floors or ceramic tile, if you only replaced the damaged pieces, it's a repair expense. But if you had to rip up the entire floor in that room and replace it with new wood or tile, that would be considered a property improvement regardless of it's cost. It would be entered in the assets/depreciation section, classified as rental property and set up for depreciation over 27.5 years. As a property improvement, you'd wait and enter it on your 2020 tax return - not your 2019 tax return. Here's why (it's a depreciation thing.)

Since the work was done after the last renter moved out, no depreciation would be required since the improvement was technically, never placed "in service". The way you do that is to give it the same value in the "cost" box and the "cost of land" box. Give it a business use percentage of 1% (one percent) with an in-service date that matches the date you closed on the sale. (this is why you can't enter the property improvement until you do the 2020 tax return.) That way, no errors are incorrectly generated by the program, and the reporting of the sale on the SCH D and 4797 will still be correct.

[Critter]

On the 2020 return, all repairs/improvements are entered on the Sch E as a repair ... do NOT enter it as an asset in the year of sale.  Doing so will annoy you beyond belief and it is not needed.  

[Carl]

all repairs/improvements are entered on the Sch E as a repair ...

Property improvements that add to the cost-basis of the property are not entered as a repair. They are entered as property improvements for the sole purpose of adding to the cost-basis, thus reducing your taxable gain on the sale.