What can I deduct as expenses for rental being sold?

[MeegsC]

I owned a house in Cape May which was rented for the first part of the year (until April 2019). It was our family home until we moved to the UK in 2016; we rented it to some friends after that. Our tenants moved to another state in May 2019, and we were not planning to return to the States anytime soon, so we sold the house in September 2019. My question is, can I deduct ALL maintenance, etc. expenses for the property for the year 2019, or only those for the four months we had tenants? We needed to get some quite significant works done before we could sell (new septic system -- ouch!) and had yard maintenance, etc. to pay for even after the tenants moved out. Also, can I include the electric bills that we paid between our tenants moving out and the sale? Yes, I know I should have filed these taxes by the 15th of October. I've overpaid our taxes due, so hopefully the fine won't be too high.

[Anonymous_ · Accepted solution]

---

@MeegsC wrote:

....can I deduct ALL maintenance, etc. expenses for the property for the year 2019, or only those for the four months we had tenants? We needed to get some quite significant works done....

---

First of all, note that improvements (as opposed to maintenance and repairs), such as a new septic system, would be added to your basis and not deducted as an expense.

You can deduct ordinary and necessary expenses provided the property is held out and available for rental use during the time it is vacant and listed for sale.

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.

See https://www.irs.gov/publications/p527#en_US_2019_publink1000219001

[MeegsC]

Does that mean I should pro-rate things like the property tax and insurance payments to only include those months that we had tenants? (We didn't rent it while it was up for sale.) And what do I do about the mortgage interest, which was reported for the whole year? Do I pro-rate that too? Or do I include the whole amount on the Form 1098 I received from the bank?

[Carl]

My question is, can I deduct ALL maintenance, etc. expenses for the property for the year 2019,

No. You can only claim as rental expenses those costs incurred up to the date the last tenant moved out, or the date you stopped advertising the property for rent - whichever date is last.

We needed to get some quite significant works done before we could sell (new septic system -- ouch!)

That is not a repair or maintenance expense. It's a property improvement that adds to your cost basis of the property. It *does* *not* *matter* when that improvement was done either. It still increases your cost basis on the property.

Enter it in the assets/depreciation section. Classify it as "residential rental real estate". Since this particular property improvement was done after the last renter moved out, you can't depreciate it, and you definitely don't want to anyway. So enter the same exact amount in the "Cost of Land" box, as you entered in the "Cost" box. Since the program will "insist" on an in-service date and a business use percentage above 0%, enter 1% business use and an in service date of the closing date of your sale. That's the only way the TurboTax program will not depreciate the improvement. (it would be wrong to depreciate it anyway, since the improvement was never placed in service as a rental asset.)

  had yard maintenance, etc. to pay for even after the tenants moved out.

Flat out not deductible after the renter moved out. Period.

Also, can I include the electric bills that we paid between our tenants moving out and the sale?

Unfortunately no.

One more thing to cover as I have no way of knowing if this applies to you or not. Since you mentioned you moved from the U.S. to the U.K., was that move as a result of military PCS, DOD or other "official" government orders? I ask, because if it was then you would still qualify for at least a partial exclusion for the "lived in 2 of last 5" capital gains tax exclusion. That means you would not have to pay any taxes on some or all of any profits realized from the sale.

[Anonymous_]

---

@Carl wrote:

My question is, can I deduct ALL maintenance, etc. expenses for the property for the year 2019,

No. You can only claim as rental expenses those costs incurred up to the date the last tenant moved out, or the date you stopped advertising the property for rent - whichever date is last.

---

That is simply misleading. Rental expenses can be deducted provided the property is held out and available for rent; it is not necessary that the property be continuously "advertised" in any manner.

[Carl]

I'm not getting into semantics. If you take physical action and stop advertising the property for rent, or make a conscious decision to not advertise at all after the last renter moves out, then it's reasonable to say that the property is no longer "held out and available" for rent.

My overall view is that if the property is sold within 5-6 months of the last tenant moving out, don't bother with all the conversion stuff and just declare it a rental for the entire time. Makes it easier and simpler to report the sale, and I've never known the IRS to question a sale where the property sat vacant for a few months prior to the sale.

I have heard of situations where the property was vacant for close to a year (or more than a year) and that would raise questions. But I personally have no experience with such a situation nor do I know anyone who did. Only what I've read from sources that I would not reference.

[Anonymous_]

---

@Carl wrote:

I'm not getting into semantics. If you take physical action and stop advertising the property for rent, or make a conscious decision to not advertise at all after the last renter moves out, then it's reasonable to say that the property is no longer "held out and available" for rent.

---

Except the IRS (and apparently Congress) did get into semantics and specifically avoided the words "advertise" and "advertising".

As a result, there does not appear to be any authority stating the property must be advertised as being "for rent" in order to meet the "held out and available" requirement.