Year in which Expenses should be deducted on preparing for sale of rental property

[sri_97]

I incurred expenses to fix up a rental property in 2021 but the sale happened in Jan 2022. The rental was not occupied since July 2021 because it was being prepared for sale. 

Question: should I be deducting the expenses in 2021 taxes or moved to 2022 when it actually got sold? Does it make a difference?

Thanks in advance. 

[ColeenD3]

You can't deduct expenses for vacant property. To be deductible, you must have a tenant or have the property available to rent. Major improvements are added to the basis of the property. All else is a personal expense.

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 is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses.

Pub 527

[sri_97]

Thank you so much for your quick response. The rental was vacant while we were preparing it for a sale. The sale itself happened in 2022 but the expenses were incurred in 2021. I was not sure when to show the expenses because they were straddling the tax year. Now I know that it can only be added to the cost basis and not be treated like the usual rental expense. Thanks again.

[Carl]

Basically, since you never had the property rented or available for rent in 2021, you will not report anything concerning this property on SCH E at all.

[sri_97]

Got it, although it was rented out till June 2021 for which I received rent. So I need to show that on Sch E along with prorated expenses like insurance, HOA etc for Jan to Jun 2021 but after that, all valid expenses will be added to the cost basis. Thanks.

[Anonymous_]

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@sri_97 wrote:

.....all valid expenses will be added to the cost basis.

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If the property was not available for rent (or actually rented), then you cannot add expenses to your cost basis; only the cost of improvements.

You can, however, deduct mortgage interest and real estate taxes if you itemize deductions.

[sri_97]

Ok thanks. So in summary:

1) Rental property in 2021 was rented from Jan thru Jun 2021 - I deduct rental expenses in Sch E for that period. Also show rental income for that period in Sch E - like normally done.

2) From Jul to Dec 2021 not rented but repairs, upkeep and improvements were done for sale. These costs would be added to the cost basis (am I correct?)

3) Sold in Jan 2022. So, New Cost basis = Original cost + expenses incurred in #2 + closing costs on sale

Sorry for repeating. Just want to be sure. Thanks in advance. 

[Anonymous_]

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@sri_97 wrote:

2) From Jul to Dec 2021 not rented but repairs, upkeep and improvements were done for sale. These costs would be added to the cost basis (am I correct?)

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Just improvements would be added to the cost basis, not repairs and upkeep (e.g., maintenance, cleaning, utilities).

[Anonymous_]

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@sri_97 wrote:

3) Sold in Jan 2022. So, New Cost basis = Original cost + expenses incurred in #2 + closing costs on sale

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Not that it makes much of a difference, but your closing costs (as the seller) would be selling expenses (i.e., deducted from the sales price).

[sri_97]

Ok good to know that. Thanks. So where would expenses for the upkeep, like, gardener, pool maint., utilities etc go? On Sch E? If so, in which year?

[Anonymous_]

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@sri_97 wrote:

So where would expenses for the upkeep, like, gardener, pool maint., utilities etc go?

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Those expenses, unfortunately, are not deductible during the time period that the property was not rented or available for rent.

Essentially, they are investment expenses which used to be deductible as miscellaneous expenses on Schedule A, but tax reform (the TCJA) eliminated those deductions.

[sri_97]

Oops. Got it. Thanks so much for all your help. Really appreciate it.