Vacant Rental Property

[smeburg]

I had been renting my property for three years. My tenant died at the end of 2023.  We have spent all of 2024 getting rid of his belongings and doing repairs thus no rent.  From my research of other posts, it appears I can capitalize all the utilities and expenses spent for the upkeep of the property this year, correct?  The property also has a mortgage and I'm trying to figure out how to deduct the interest, taxes and insurance on the property.  Should I add those to the total amount of improvements like the utilities?  In 2025 we will probably sell it, but renting it is a possibility.  Although we did mention it being available for rent to a few close acquaintances we never publicly put it up for rent while we were working on it so I understand it is no longer rental property?

[pk]

@smeburg  

(a) I would refer you to  IRS Pub 527 for reasonably exhaustive  and general; information about how to  deal with rental properties.

(b)  Expenses for repair  and restore  of the property / asset  is  generally included   under repair category on Schedule-E.   Even in the case of zero rental income, these are still listed as "Expense" and not " capitalized " i.e.  not depreciated over useful life  of  the item in question.

(c)  Improvements , on the other hand  ( i.e.  which  increase the  Fair Market Value  of the asset ) must be  capitalized ( i.e. depreciated ) over the  useful; life of the asset in question.  For example  if the refrigerator  is not working  and is repaired i.e. put back in operation, it is a repair while replacement of the  refrigerator  with a new one  should be  capitalized.

(d)  In general  if  your Schedule-E reporting results in a loss ( income LESS allowable expenses LESS  yearly total depreciation ) and  is  above the PAL    (Passive Activity Limit ) for the taxpayer, then  the excess goes into suspended losses. Accumulated suspended losses  are either used up in the following years  or finally  released  at the time of disposition as part of the  gain/loss computation  on form, 8797

(e) if the intention of the repairs / improvements  executed is  for rental then generally property still  remains subject  rental rules / characteristic.  This is of Course assuming that  the property  has not been used for personal purposes  beyond  the yearly allowance.

From what you describe in your post . I think your  prop. is still rental / income property and therefore Schedule-E is still valid ( even if the  rental income itself is zero for the period ).

The other option is to consider the property  as second home  and therefore repair expenses are disallowed  but improvements are added to your basis in the property -- not capitalized.   Note that mortgage interest  deduction  comes under  your total ( i.e. your main home plus one second home ) indebtedness  limit .

Another point to note that  when you convert a rental/income property to second home, your basis in the property  is adjusted taking into consideration accumulated depreciation  while being rented.

Does this make sense ?

[smeburg]

I have been writing off expenses on Schedule E for the past three years and even have carryover from years when the income did not exceed them.  The confusion comes from "not being available to rent" and no income that Turbo tax says the IRS does not allow rental expenses during the time of rehab.  I have checked the publication and can't find it directly addressed.  It was never converted, was bought as a rental property, never used for personal use.  I thought I could write off as selling expenses but since it won't be sold until 2025 I hope to not lose those expenses if I can't add them to my loss carryovers.   Another post mentioned that in the special case of rehabbing, the expenses of maintaining the property in a manner to do repairs (utilities etc) could be added to the basis since it was not rental property during the time because it was not available to rent. 

[RobertB4444]

Since the house was not available to rent then all of the expenses that you had should be bundled together and added to the basis for the property.  

@smeburg 

[smeburg]

That's what I plan to do with the utilities, insurance and security expenses along with the roofing,paint and other materials.  So the only two items left are the real estate taxes and mortgage interest which it seems I can  take on my schedule A if I meet the other schedule A limits? And since there is no Schedule E (not a rental property in 2024) I will have no depreciation for 2024 either.  Does that sound correct?  Thank you.

[KrisD15]

Yes, you may claim the expenses on Schedule A if you itemize. 

You won't receive depreciation after it was no longer a rental (in 2024), however you will still need to address the depreciation recapture. 

It will be a little tricky at that point since when the property is sold, you will need to estimate how much of the sales proceeds go against the basis you reported when the rental was placed in service. 

In other words, say you purchased and placed the building in service with a basis of 100,000.

Say the depreciation taken (or could have been taken) is 25,000.

Now the "Adjusted Basis" is 75,000.

If it's sold for 250,000, you would have 25,000 depreciation recapture (Ordinary Income) and 150,000 Capital Gain. 

Same example, but in 2024 you spend 5,000 to clean and paint and 15,000 on a new roof and 7,000 on landscaping that all died. 

If it's sold for 250,000 you will still have 25,000 depreciation recapture, but the Capital Gain will be a little harder to figure. 

Do you add the roof to the basis of the house? Can't add cleaning and paint since that does not increase the value and the landscaping all died. So if the new adjusted basis is 90,000, you'll have 25,000 depreciation recapture  and135,000 Capital gain.  12,000 for the cleaning, painting and landscaping that died would be lost because those things did not add to the value of the house from when it was first placed in service. 

It is a bit complicated. Expenses (like maintenance)  paid for a building that is not available for rent are lost. Make sure you keep good receipts.