I have been renting my house to my daughter for almost a year. She is recovering her credit rating and her situation is improving since her divorce. We will likely be able to sell it to her later this year via an FHA mortgage. I imagine that the FHA will say that the roof needs to be replaced. Can I deduct the cost of replacing the roof as an expense required to sell the house, or is it just subject to the depreciation allowance?
You have not indicated if you were taking a deduction on Sch E for the rental of your property to your daughter. If you were then you might have a taxable event when you sell it.
It is just something to consider. If you haven't been renting it to her at a fair market rate or she hasn't been paying the rent then it might hurt you to treat it like a piece of rental property. Depends a great deal on how you have been reporting it - or if you weren't reporting it.
Either way, putting a new roof on doesn't get taken as a deduction. It reduces the amount realized from the sale and is treated as a selling expense.
No, the cost of replacing the roof is not deductible as a selling expense, it will be added to your basis in the house. It will reduce your gain (or increase the loss) on the sale of the house to your daughter.
See this section of IRS Publication 523 for Examples of Improvements that Increase Basis. Those same rules apply to the improvements to a rental property.
You have not indicated if you were taking a deduction on Sch E for the rental of your property to your daughter. If you were then you might have a taxable event when you sell it.
It is just something to consider. If you haven't been renting it to her at a fair market rate or she hasn't been paying the rent then it might hurt you to treat it like a piece of rental property. Depends a great deal on how you have been reporting it - or if you weren't reporting it.
Either way, putting a new roof on doesn't get taken as a deduction. It reduces the amount realized from the sale and is treated as a selling expense.
I did have her sign a lease-to-purchase agreement, charging her fair rental price (according to an online real estate zip code tool). I reported it all as income, but am setting aside some of her monthly payment as a credit toward her purchase. I also deducted some expenses last year for things like HVAC service, yard maintenance, etc.
I just didn't know whether the cost of replacing the roof, if required by FHA, would count as a business expense. And you clarified it for me that it'selling expense, reducing the amount realized from the sale. So Thank you very much for the information.
Mike Celeski
@mikeceleski wrote:charging her fair rental price (according to an online real estate zip code tool). I reported it all as income, but am setting aside some of her monthly payment as a credit toward her purchase.
If you are reporting that as rent, that is not a credit for the purchase. If it a credit for the purchase, that is not rent and you may not be charging Fair Market Rent, which may mean your "rental" deductions are invalid.