Rental property renovations for sale spanned two years

[bart11733]

My last tenant moved out of my rental property in 2019 and I immediately started renovating it for sale. The renovations were completed in 2020. I reported rent and deducted all the usual expenses on schedule E for 2019. The renovations to the end of 2019 were reported as depreciable real estate and a small deduction was realized on the 2019 return. Since it was not rented in 2020 my understanding is that it needs to be reported as a "sale of business property" on form 4797.  So, I will add renovation expense in 2019 that was not taken in the depreciation calculation and the renovation expense in 2020 to the cost basis. Can I also add my expenses for the property in 2020 to the cost basis? This would be things like taxes, utilities, maintenance and repairs - things that would have been deductible had it still been rented.

[ColeenD3]

Yes, if you sold the property in 2020 and did not rent it, it is reported under Sale of Business Property. Once you indicate the change in rental status, the Schedule E will be deleted, so print the depreciation worksheet and any other necessary information before that happens.

No. You have no expenses for 2020. Property must be available to to be rented to be able to take expenses. Any major improvement can be added to the basis.

From Pub 527:

Vacant rental property. If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you cannot deduct any loss of rental income for the period the property is vacant.

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 is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses.

[bart11733]

Thanks for the Info. I'm just a little confused about part of the reply. The question was not about taking the 2020 expenses as a deduction which the information provided seems to address - and I realize that I cannot do - but rather adding said expenses in the year of sale (2020) to the cost basis of the sale to reduce the capital gains realized from the sale. It's mathematically equivalent under some, but not all, circumstances but not necessarily procedurally equivalent. 

[PattiF]

No, you are not able to add the ordinary expenses such as taxes, utilities, maintenance and repairs to the cost basis. 

Expenses from the settlement statement paid by the seller would be added to the cost basis such as the abstract fees, legal fees, transfer taxes and recording fees.