Sold a rental property in 2021. Is the mortgage interest paid while unrented a selling expense?

[23bambam23]

The property was never rented in 2021.  The sale closed in March 2021.  I am unsure where to enter the  mortgage interest paid in 2021 from the 1098 form in Turbotax.  Would this be classified as a selling expense I can use to reduce the basis of the rental property?

[DianeW777]

Yes, if the mortgage ended at the time of the sale you should use the mortgage interest paid as rental expense. It is not part of the selling expenses.  Likewise you should enter the real estate taxes from the settlement statement which would be your share for 2021 regardless of what you might have paid. 

This answer assumes the property was available to rent until it was sold or you had a contract to sell.

Use the rental section to sell your assets from the rental activity. See the information below.

The selling price should be prorated for each asset then entered for each asset when you indicate they were sold or disposed of. You will not lose the remaining depreciation because you will use the remaining basis against the selling price to determine gain or loss. 

To figure out the selling price for each asset:

1. Take the current basis of each asset against the total combined basis of all of your assets to figure out the sales price for each one; OR 
2. Determine a fair market value for each asset against the total value of all assets to figure out the sale price for each one. 

Use the original cost of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset.  Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset.

Example:  Original Cost (of each asset on your depreciation schedule)

$10,000 Land                = 13.33% 

$50,000 House              = 66.67%

$15,000 Improvements  = 20%

$75,000 Total                 = 100%

Multiply each percentage times the sales price/sales expenses to arrive at each individual sales price/sales expense.

You need to dispose of the property by telling TurboTax how and when it was disposed of.  Follow the instructions below.

1. Click on Income & Expenses
2. Under Your income and expenses, scroll down to
3. Rental properties and royalties, click Edit/Add
4. Do you want to review your rental?, click Yes
5. Under Rent and Royalty Summary, click Edit
6. Click Update to the right of Assets/Depreciation.
7. Do you want to go directly to your asset summary?, click Yes and Continue
8. Click Edit to the right of each asset to be disposed
9. Go through several screens until you get to Tell Us More About This Rental Asset
10. Click on This item was sold…….   And continue to answer the questions

You might also review information here.

[23bambam23]

Hi Diane,

Thanks so much for your response, however we spent the first two months of 2021 preparing the house for sale, so it was not available to rent.  How would that affect how I treat the mortgage interest expense in TT?

[ColeenD3]

If it was not available to rent, it was your second home until the time of sale. Include the mortgage interest and property taxes on your Schedule A.

[23bambam23]

Thanks!

[RichExp]

From what I gathered, the mortgage interest paid while unrented could be considered a selling expense. I used TurboTax, and there's a section where you enter selling expenses to reduce the basis of the property. As for Mortgage Broker Lincoln, I didn't directly deal with that, but I'd recommend checking if they have any insights. They might have some experience or guidance on how to handle such situations. Would love to hear from others who've been through this or any seasoned pros who can confirm if I'm on the right track!

[ThomasM125]

Selling expenses are costs used to prepare the house for sale. A mortgage payment would not likely qualify for that. It is a cost of ownership not directly related to the sale of the house.