Vacant Rental Property Expense while preparing for Sale

[daweigedavid]

Hi All,

I owned a rental property which was purchased as investment property and always has been used as investment property. 

My tenant basically trashed the placed and behind on rent. The tenant moved out in July 2023. Since then, I have been hiring people to clean up and perform improvement to the property to prepare it for sale, and it was sold in February 2024.

I have read the publication 529 and it states the following:  Publication 527 (2023), Residential Rental Property | Internal Revenue Service (irs.gov)

"

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 can’t 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 isn’t held out and available for rent while listed for sale, the expenses aren’t deductible rental expenses.

"

However, I am still a little confused about how to correctly treat the following expenses after the tenant moved out and the eventual sale of the property. 

1. Removed all the belongings (furniture, garbage, etc) and clean the house to habitable condition - I am not sure if this is rental expense, or could I put it as selling cost

2. Painted all the walls - I am not sure if this is an expense or an improvement to be added to cost basis

3. Refinished hardwood floors - I am not sure if this is an expense or an improvement to be added to cost basis

4. Replaced outdated countertops, kitchen floor tiles (this is clearly improvement and should be added to the cost basis)

5. Property Tax and Insurance during vacancy - not sure how to divide this. 

Some of the works were done in 2023 and some were done is 2024, do you know what should I enter in 2023 returns.

Thank you!

[tagteam]

Simply put, if the expenses, such as utilities, repairs, insurance, were incurred and paid for while the property was not available for rent, then they are not deductible as typical rental expenses.

You can deduct mortgage interest and property taxes as well as add the cost of improvements to your basis, however.

[daweigedavid]

@tagteam Thank you for your reply.

Would I be able put the repair expense as part of the selling expense in my 2024 return (when the property was sold)?

 I am asking because the clean-up and repairs are a result of tenant trashing the property, and I feel like the expense should go somewhere because it is business-related instead of plain out not deductible.

However I understand that since it is not considered rental since the tenant moved out, those expense can’t be on Schedule E. 

[tagteam]

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@daweigedavid wrote:

....I understand that since it is not considered rental since the tenant moved out, those expense can’t be on Schedule E. 

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Yes, but you could consider all of the expenses you paid to be one, large, remodeling (rehab) project and add the total cost to your basis. 

[daweigedavid]

Thank you. Just making sure I am understanding it right, since significant work was done between the last day of tenant move out and the final sale, I could consider cleaning and painting as part of the large rehab project and add it to the cost basis, even though painting and cleaning are typically considered as expense instead of improvement? 

[tagteam]

Yes, if you consider the various repairs and maintenance to be part of one large remodeling project.

[daweigedavid]

Thank you so much. One more last question, what about utilities while the rental property is vacant and up for sale? Of course this cannot be in Schedule E either.

Could utility be part of sales expense or is it just outright not deductible at all?  

[tagteam]

Unfortunately, those expenses would not be deductible unless the property had been made available for rent.

However, you do need power for the purposes of the remodeling project so the expenses could be added to the basis during the period the work was in progress.

[daweigedavid]

Very interesting. For a remodeling project, electricity, water, and gas (so that stuff won't freeze during winter) are definitely needed as part of the improvement project. 

[tagteam]

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@daweigedavid wrote:

...For a remodeling project, electricity, water, and gas (so that stuff won't freeze during winter) are definitely needed as part of the improvement project. 

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Yes, they are.