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RIRAHomes
New Member

Rental Property Closing In December

Tax experts, we have the opportunity to close on a rental property in December vs January of next year.  What are the pros and cons from a tax perspective of doing so?

 

Thanks 

6 Replies
Critter-3
Level 15

Rental Property Closing In December

Paying  the taxes on the gain and recapture in 2021 or 2022 it will be the same for the sale  ... so it depends on the rest of your situation as to which tax year you want to take the hit. 

RIRAHomes
New Member

Rental Property Closing In December

We will only be buying a rental property (potentially) in December; no sale involved.

Critter-3
Level 15

Rental Property Closing In December

Ok ... on the purchase then ...  it will not make much of a difference at all. 

 

If there is a tenant already  in place then you will report the income/expenses for the period you owed it on the 2021 return if you buy in 2021. 

 

If there is no tenant in place when you buy it then the property is reported on the Sch E when you first make it available for rent what ever tax year that happens to be. 

 

Read up on rental property rules in the IRS Pub 527 :    https://www.irs.gov/forms-pubs/about-publication-527

 

 

Carl
Level 15

Rental Property Closing In December

If the rental property has a renter in it on or before Dec 31 of the tax year then everything gets reported on SCH E.

If the rental property is move-in ready and available for rent on or before Dec 31 of the tax year, then everything gets reported on SCH E.

If there is no renter in the property and/or the property is not available for rent on or before Dec 31 of the tax year, then nothing concerning the purchase is reported on SCH E. It's treated as the purchase of a 2nd home. The only deductible things will be property taxes and any mortgage interest paid in the tax year. That's it. More than likely if you close on the purchase in Dec then your first payment will not be due until the next tax year. Therefore a 1098-Mortgage Interest Statement might not be issued. However, on your closing statement it will show pre-paid mortgage interest paid at the closing which can be claimed on the tax return. Where you claim it depends on if the property is in service or not, on or before Dec 31 of the closing tax year.

You will deal with other closing costs on the tax return for the tax year the property is placed in service and is at least available for rent at a minimum.

All the above is assuming you will "IN FACT" rent the property out successfully, at some time during your period of ownership, regardless of what tax year that may occur.

 

Mike9241
Level 15

Rental Property Closing In December

It's really all about the $'s you have left after paying taxes.  it's likely, ignoring the sale, your income will be different for 2021 than 2022 so the taxes you pay on the gain can differ between the years.  tax laws are constantly changing. it's even likely unless you have a signed sales contract, the sales price and hence your net could differ depending on the closing date. if there's a mortgage and certainly real estate taxes you will net less (all other items remaining the same).  then there is the risk if you don't have a signed sales contract. I know of cases where sellers quickly got almost their full asking price but believing they could get the full amount waited. then after not get any more offers even close to the initial one, they eventually had to accept a lower price months later.  but today the real estate market is in flux. Supposedly values are climbing.  It's hard for me to understand considering all the evictions that will take place due to renters and owners inability to make required payments.  a lot of vacant space and fewer people able to afford the costs. 

VolvoGirl
Level 15

Rental Property Closing In December

@Mike9241   You're a day late and a dollar short.  It was not a Sale.  Just a purchase.

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