Is the repair expenses deductible for my house sold to tenant while showed on the closing statement as seller credit?

[ching19]

I sold my house to my tenant on 5/29 while the lease was supposed to end on 5/31, instead of doing the repairs, I gave her the repair estimate as a seller credit when we closed the house and it showed on the closing statement. So is that seller credit deductible against the rental income supposed to be ending on 5/31? Thanks in advance!

[Opus 17]

The seller credit reduces your selling price, which reduces your capital gains.  You can't deduct them as repair expenses because you did not pay to make repairs.  (I have additional thoughts about whether you could actually deduct a repair that was made 2 days before you take the property out of service.  But that doesn't have to be argued here.)  You did not pay for repairs, therefore you have nothing to deduct.

[ching19]

Thanks!

[Anonymous]

I disagree. I would take them as a repair. The fact that you didn't actually pay the item should not affect the deductibility.  this should be treated no differently than a credit to the buyer for unpaid real estate taxes.  the same would be true for credits for unpaid utilities, HOA fees, or other expenses related to the rental.

 Following Opus 17.  those would not be deductible as an expense because they were not paid but would be treated as a selling expense.  

[Opus 17]

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@Anonymous wrote:

I disagree. I would take them as a repair. The fact that you didn't actually pay the item should not affect the deductibility.  this should be treated no differently than a credit to the buyer for unpaid real estate taxes.  the same would be true for credits for unpaid utilities, HOA fees, or other expenses related to the rental.

 Following Opus 17.  those would not be deductible as an expense because they were not paid but would be treated as a selling expense.  

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I don't understand your answer.  You seem to be saying both yes and no.

I don't believe these are deductible repair expenses on schedule E.  I believe that instead, they are an adjustment to the selling price on schedule D.  (As a result, the potential savings is slightly less, but that's the way of things.)

How can you deduct a repair expense you did not actually pay?  If the repairs were made during the rental period they would be a deductible expense.  Or if the landlord gave the tenants a discount on their last month's rent, that would also show up on schedule E (as reduced income rather than a deduction).  But here, the landlord/seller has no way to verify that the repairs were actually made or that they cost the amount agreed upon, and the repairs were definitely not made while the landlord/seller owned the property, but after the property changed hands. Therefore they can't be deducted as landlord repair expenses.  However, a seller's concession, for any reason, can be applied as an adjustment to the selling price. 

[Critter-3]

Since you cannot change the 1099-S selling price the IRS expects to show up on the return  you should add those costs to the other selling expenses instead. 

[ching19]

This is clearer, I am deducting it on schedule D.

My house was purchased 19 years ago and was only for rent for 1 year, so I need to file Form 8949 and schedule D but I don't have to pay the tax on the capital gain, correct?

And where on schedule D will exempt me from the capital gain tax? Thanks!

[ching19]

Btw, I didn't receive any 1099-S, do I still have to report? 

[Critter-3]

If you told the closing company it was a rental property at anytime then a 1099-S should have been issued at closing ... so if you didn't you should still report the sale as if you did get one ... make sure to mark you did get one and also indicate the depreciation taken while it was a rental as you complete the sale of residence section  and the program will compute the recaptured depreciation on the form 4797 and the excluded cap gain on the Sch D. 

If you sold your primary personal residence and you lived in and owned the home for at least two years in the five year period on the date of sale, you do not have to report the sale if your gains are less then the exclusion amounts of $250,000 if filing Single or $500,000 if filing Married Filing Jointly (and both lived in the home for two years).  

If you had a gain greater then the exclusion amounts then you would have to report the sale.  Also, if you received a Form 1099-S for the sale either with a gain or a loss, the sale has to be reported.  You will need the online TurboTax Premier or Self-Employed edition to report the sale if you are using the online editions.   Make sure that you indicate that you want the sale of the home reported on your tax return.  (See Screenshot)***

• Click on Federal Taxes (Personal using Home and Business)
• Click on Wages and Income (Personal Income using Home and Business)
• Click on I'll choose what I work on (if shown)
• Scroll down to Less Common Income
• On Sale of Home (gain or loss), click the start or update button

Or enter sale of home in the Search box located in the upper right of the program screen.  Click on Jump to sale of home

[Opus 17]

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@ching19 wrote:

Btw, I didn't receive any 1099-S, do I still have to report? 

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Abso-fricken-lutely.  When selling rental property, you have to recapture (pay tax on) all the depreciation that you claimed or could have claimed when it was a rental.  Then you have to pay regular capital gain tax on any additional gain, unless this was your personal home before you turned it into a rental, and depending on certain time rules.

Exactly how to report it in Turbotax will depend on whether it was ever your personal home before you turned it into a rental, or was always only a rental.

Just because the IRS doesn't get a 1099-S for you doesn't mean you don't owe the tax.  If audited, you would owe back taxes with interest and penalties for failing to report this income. 

We can talk about capital gains and depreciation more if you need that info.  It will help to know if this was ever your main personal home, and the various dates you bought, converted to rental, and sold. 

[ching19]

I didn't claim depreciation because I was expecting to sell it soon. And it was only rented out for total a year. Prior to that, it was my primary residence for 19 years, the capital gain in total is less than $250k. 

Should I still report it? I think I told the closing company I sold it to my tenant, but I didn't receive any 1099-S, should I ask for it? 

[Opus 17]

More than a year? (Even by a day.)  Or exactly 1 year or less than 1 year?

[Critter-3]

If the rental portion spanned more than one tax year then depreciation should have been taken ... you may wish to seek local professional assistance for this return so you get it correct. 

[ching19]

2 days to be a year, since the house was sold 2 days before the lease was expired.

[Anonymous]

a seller's credit to the buyer and a charge to you the seller?   otherwise, the other way around, you don't have a repair expense.