Inherited father's home in 2020, spent $50K performing fixes/renovations in 2020, will be closing on the sale of the home in early 2021. Does anything go on 2020 return?

[ashdrewness]

My understanding is I would claim this on my 2021 return as capital gains but want to be sure since the inheritance+renovations occurred in 2020 but sale will occur in 2021.

Also, my understanding is that say the home was worth $160K at the time I inherited it, I spent $50K in repairs/renovations, then sold for $240K my taxable gains would be $30K correct?

[Anonymous_ · Accepted solution]

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@ashdrewness wrote:
Also, my understanding is that say the home was worth $160K at the time I inherited it, I spent $50K in repairs/renovations, then sold for $240K my taxable gains would be $30K correct?

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Your understanding is correct, @ashdrewness, and you have nothing to report until there is a disposition (unless you the property is being used for rental purposes).

[ashdrewness]

Thank you. 

[Hal_Al]

Until you put the property to use as your primary or second home or as rental property, or sell it, you have an investment property*. The carrying costs (e.g.  repairs, insurance & utilities) of investment property are not deductible, staring with tax year 2018. Real estate (property) tax may be deducted on schedule  A, under taxes

Alternatively, taxpayers can elect to capitalize (add it to your cost basis)  the deductible carrying costs of unimproved and nonproductive real property, real property under development or construction and personal property before its installation or use (Regs. Sec. 1.266-1(b)(1)).  The election is made with the tax return by its due date, including extension, by attaching a statement. You cannot wait until you sell the property, but must make that election each year. Attach the statement to the return and write “Filed pursuant to section 301.9100-2” on the statement. You may add the carrying costs, incurred in the year of sale, to your cost basis. 

Mortgage interest is only deductible to the extent of other investment income. 

*If there was personal use, between inheriting and selling, you may not capitalize  carrying costs. Mortgage interest (not more than 2 homes) and real estate taxes would be deductible as itemized deductions. 

[Anonymous_]

The problem with capitalizing all, typical, carrying costs after the TCJA is the following (from the Reg):

An item not otherwise deductible may not be capitalized under section 266

As a result, taxpayers can now only capitalize not much more than property taxes and mortgage interest (if any).