Rental property sold in 2024

[laddielg]

I have rented out a condo unit for a number of years. Each year I have declared passive income received from the rents against applicable rental expenses – including depreciation of about $9,000 each year. My tenant moved out of the unit at the end of January 2024, and at that point I was unsure if I would try to re rent the unit or sell the unit. Regardless of which of those decisions I made, I went ahead and completed minor repairs at the unit while the unit was vacant. These repairs included fixing minor water leaks, patching and touchup painting minor scuffs and abrasions on walls, and replacing a few broken boards and rails on the outside deck. Though no one occupied or lived in the unit after the renter moved out at the end of January 2024 I continued to pay for HOA fees, insurance, and utility costs at the unit.

In May 2024 I decided to try and sell the unit if an acceptable selling price could be negotiated, so I listed the unit for sale with a local real estate agent. If an acceptable sales price could not be agreed, I planned to just re rent the unit. After the usual negotiation with several potential buyers, I finally sold the unit in early August 2024. Part of the negotiation with the buyer included my agreement to pay for some exterior unit repairs owners needed to make before a HOA exterior painting project could be completed sometime later in 2024.

My question is how do I account for the expenses incurred at the vacant unit after the renter moved out at the end of January 2024? Are these considered expenses against passive rental income, or selling expenses, or for tax accounting purposes should some of these expenses be considered increases in the basis of the unit sold? A summary of expenses incurred at the vacant unit between February 2024 and the August closing date were:

HOA fees of $400/month

Utility fees paid of about $200/month

Minor repair costs made by the owner after January 2024 – these are costs I paid for materials purchased at the local home improvement centers (about $1,500)

Costs paid to contractors after January 2024 to fix minor water leaks and to re stretched carpeting in two rooms of the unit ($760)

Exterior repairs to the unit made after May 2024 to comply with conditions the buyer insisted be met as a condition of the sale (about $3,100)

Home and termite inspection fees of $710

Appliance insurance costs of 73/month

I also need to know how/where each of these expenses should be entered into the 2024 TurboTax program.

One final issue I face is how to handle depreciation expenses on the unit. Clearly depreciation in January 2024 will be applied against rental income received in January 2024, but how about depreciation for February through August 2024?

[KrisD15]

Technically, from your explanation, the rental was converted to personal use February 2024. 

The repairs, as well as HOA fees, etc. cannot be expenses since the rental was not active.

Had you advertised it as available for rent, even if it was not occupied, you COULD have continued to treat it as a rental, but from your description, that was not the case.

If it was converted in February, your "Adjusted Basis" would be calculated at that time. Your Adjusted Basis would be your cost, less depreciation plus improvements for the building. Since land does not depreciate, the adjusted basis is normally the original cost of the land. You would use the depreciation taken (or could have been taken) through February 2024. 

In TurboTax, first enter the income and expenses for the rental (through January) 

Next, report that it was converted to personal use. 

Once you account for the rental income and expenses, you need to enter the sale under:

Wages & Income

Less Common Income

Sale of Home (gain or loss)

Continue through the interview

You will be asked about other use (rental) and depreciation. 

The depreciation will be 1250 gain and reported on Schedule D line 19

The capital gain will be reported on Schedule D and carry to the 1040 line 7

The repairs you were required to make in order to close is not considered a closing cost. 

You can think of it like this, Buyer agrees on a 100,000 selling price if you do 5,000 repairs. 

So, the house must only be worth 95,000 without the repairs. 

You make the repairs and get 100,000. You can't deduct the 5,000 repairs because the higher selling price accounted for that 5,000 in repairs. 

If you paid 100,000 for rental property and depreciated 90,000, your adjusted basis would be 10,000.

If you sell for 150,000

90,000 is depreciation recapture (1250 gain) and 50,000 is capital gain 

(The 50,000 gain would need to be allocated between the land and building, but the tax result will be the same) 

IRS Pub 527