Inherited rental property in 2023, demolished shortly after inheritance

[psubradster]

Hello,

I inherited property in early January 23 that was likely soon to be considered a nuisance as there were many police calls/drug use. I never received any rent and let the only current tenant know that he had to leave in December 22 and he was gone by the end of January 23. This was a 2 unit property with one side vacant due to disrepair. Because of the costs associated with renovating the very old structure and the reputation of the building, I had the building demolished in May 23 to try to get rid of the reputation of the location, and keep peace with the neighbors as the surrounding neighborhood is not a bad area. In addition to that demo cost, I have continuing costs for taxes and keeping the sewer and water connections as I intend to rebuild rental property in the future when economic conditions warrant.

Can I claim these as losses in investment property in 2023? I didn't receive any rent, so it kicked me out of that loop in the program.

[psubradster]

So I paid the $50 to get live advice from TurboTax, and the person suggested that I enter the money spent last year on demolition, water and sewer fees as a loss in Miscellaneous Income, and have those receipts ready should the IRS call for proof. Does anyone have an opinion on that? As of now, I plan on rebuilding rental units in a 5 year timeframe, but you never know what is going to happen and it's always possible that I'll just sell the now empty lot.

[DianeW777 · Accepted solution]

No, these expenses for now are regular maintenance and will not be deductible during the period you hold or rebuild.  The demolition costs could be added to the cost basis of the property cost when it is rebuilt and all of that becomes an asset for depreciation when you actually place the property in service for rental purposes. 

The cost of the property to you right this minute is the fair market value (FMV) on the date of death of the deceased, plus the demolition costs.  One the property is available for rent, regardless if it is actually rented you will be able to begin using your expenses. 

Maintenance is not going to be an expense which includes utilities, including sewer fees.  If you do not end up creating a rental unit and you end up selling it, you will use the cost basis described as the purchase price against any sales price you might have and of course less any selling expenses.  

@psubradster 

[psubradster]

@DianeW777 

Thanks for that prompt response. That feels much more appropriate based on my very limited knowledge of the subject matter. I just wanted to make sure I would be able to capture my investment in the property whether it be now or in the future, and your explanation makes perfect sense.