Sale of rental property

[krjohnson]

I sold a rental condominium in December 2024 and need advice on what expenses can be deducted.

1) Due to strict tenant laws in the city it was located in, I used a "cash for keys" agreement to relocate the tenant prior to sale.  Can this amount be considered a sales expense and deducted?

2) To get the property ready for sale I had new paint, flooring, lighting, and appliances.  Are any of these considered sales expenses?

[DaveF1006]

Yes, this can be deducted as a selling expense and deducted from your sales proceeds. You may add flooring, lighting, and appliances to the basis of your house. Don't add these as expenses, but you may add them to the basis of the house.

Adding the flooring and improvements to your basis and deducting cash for keys will lessen the capital gains on the sale of the condo.

[krjohnson]

Thank you.  May I ask a related question?  In entering these items in TurboTax as rental assets, do I take depreciation, and if so, how?

[AmyC]

You are adding the assets with purchase date and purchase price and marking them disposed of on the sale date for a sales price of zero. I would put paint under maintenance as an expense.

[krjohnson]

I am using Turbo Tax Premier desktop.  I have added the new floors and appliances as assets, but TT did not adjust my basis to include the additional items.    

[DianeW777 · Accepted solution]

See the answers to your questions below and see your other question and answer which may be duplicated in part.

1. Yes, report all of the income from the property, and ordinary expenses, then add the 'cash for keys' as part of your selling expenses.
2. Any improvements in 2024 cannot be added as assets because the tax law requires that assets cannot be placed in and out of service in the same year. For this reason you will add these improvements as selling expenses.
3. Remove any new assets you added that were placed in service in 2024.

Next sell each asset in your rental activity after allocating sales price and selling expenses to each asset.  Other items you can add to the selling expenses are shown below.

Government Recording and Transfer Charges 

• Recording fees
• Title Charges
• Lenders Title Policy
• Settlement or Closing Fee
• MLC - Municipal Lean Certificate
• Title Exam
• Owners title Insurance

You can include these closing costs and add them to the cost basis of the property as noted above.

Example of arriving at the selling price and sales expenses for each asset in your rental activity.

Example:  Original Cost (of each asset on your depreciation schedule)

$10,000 Land                = 13.33% (Carries a more favorable tax treatment but if you don't have land you can ignore this asset.)

$50,000 House              = 66.67%

$15,000 Improvements  = 20%

$75,000 Total                 = 100%

Multiply each percentage times the sales price/sales expenses to arrive at each individual sales price/sales expense.