Rental income expense deductions

[BobWattsi]

I own two residential rental properties that I manage, repair, and renovate.  When repairs or renovations are being made and there is no income, how long can expenses such as utilities, taxes, and insurance be deducted?  I have seen where there is some sort of total income criteria, such as less than $100,000.

Same question if they are for sale?

[tagteam · Accepted solution]

IRS guidance is as follows:

Vacant rental property.

If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you can’t deduct any loss of rental income for the period the property is vacant.

Vacant while listed for sale.

If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. If the property isn’t held out and available for rent while listed for sale, the expenses aren’t deductible rental expenses.

Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it isn’t available for rent.

See https://www.irs.gov/publications/p527#en_US_2019_publink1000219042  and

https://www.irs.gov/publications/p527#en_US_2019_publink1000219000

[bob_brown]

@tagteam Vacant while listed for sale......so I listed my rental for sale can I deduct the rental expenses while it is for sale if it was available for rent?  What does available for rent mean....it is a rental property of course it is available for rent.

[ColeenD3]

Available for rent means that a tenant can move in at any moment. Most people who are trying to sell do not want a tenant making a mess of the unit. In addition, you would have to have a renter who would be willing to move in and then move out again at the drop of the hat when the sale goes through.

Expenses that are taken as a rental expense and sales expenses that are added to the basis of property are two totally different types of expenses. Mortgage interest and property taxes are not added to the basis, nor are any other expenses you would take on Schedule E.

The following sales expenses are allowed.

Sales Expenses for selling your property include:

• Sales commissions
• Advertising Expenses
• Legal Fees
• Broker Fees
• Transfer taxes

@bob_brown

[bob_brown]

@ColeenD3 I guess I do not know the first sentence is pretty straight forward......the second sentence the way I interpret that is if it is available for rent like it could be rented if need be.....what if it does not sell?  Why even make the first statement that you can deduct the expenses if the second sentence meaning is if it is not listed for rent or you are intending to rent it that the expenses are void.  Available to rent means that yes the property is functioning and the utilities are hooked up and it is "available for rent" if the sale from the first part of the sentence does not go through.  I mean I think the IRS is trying to prevent people from just listing a rental for sale and taking losses on it for extended periods of time if a house sells in two to three months that is pretty normal.  It is a rental property what do you do with those expenses?  I mean it is not like I was going to turn it into a personal property....nothing changed it could have been rented out. 

[bob_brown]

@ColeenD3 now say you are doing some remodel and the house is completely unlivable then yeah the house is not available for rent.  Or if the HVAC system was broken and the water utility is not hooked up I would think that it is not available for rent.  So between the time that you have it on the market for sale you are doing work on the house that prevents it from being rented out then IRS may say hey you can't just take your good ole time selling your house writing off the losses while fixing it on your tax return.

[ColeenD3]

That's fine. It you meet the IRS definition of, "hold property for rental purposes" then you deduct your expenses on Schedule E.

[bob_brown]

@ actually the Pub 527 contradicted itself in another area.....so I cannot take rental expenses if it is not held out and available for rent right?  Check this out in Pub 527 

Retired From Service
You stop depreciating property when you retire
it from service, even if you haven’t fully recovered its cost or other basis. You retire property
from service when you permanently withdraw it
from use in a trade or business or from use in
the production of income because of any of the
following events.
• You sell or exchange the property.
• You convert the property to personal use.
• You abandon the property.
• The property is destroyed.

So you stop depreciation when you sell the home but the other rental expenses are ceased the day it hits the market?  Oh come on IRS.  Makes not sense. 

[tagteam]

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@bob_brown wrote:

.....between the time that you have it on the market for sale you are doing work on the house that prevents it from being rented....

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The mere fact that an owner is doing work on a rental property does not necessarily make it "unavailable for rent" or prevent it from being rented.

In other words, there is no requirement (that some seem to believe) that the property needs to be in "move in condition". A plethora of homeowners continue to live in their homes while their kitchens, bathrooms, etc., are being completely renovated.

[bob_brown]

@ColeenD3 Yes good point lets break the sentence down 

Vacant while listed for sale. If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. If the property isn’t held out and available for rent while listed for sale, the expenses aren’t deductible rental expenses.

HELD that is a past tense word not "are holding" or "currently holding" so the IRS is saying yes you held this property for rental purposes and now you are selling it.  Go ahead and deduct the expenses BUT if it is dilapidated and getting a major facelift and cannot be rented then its not available for rent and you cannot work on the house for 8 months and deduct rental expenses on the intent to sell it.  I get it.

[bob_brown]

Ok go tear the bathrooms apart and tear the flooring up and see if you can rent it out.  Maybe below market rate.....and then there are rules to prevent you from renting it below FMV.

[tagteam]

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@bob_brown wrote:

Ok go tear the bathrooms apart and tear the flooring up and see if you can rent it out.  Maybe below market rate.....and then there are rules to prevent you from renting it below FMV.

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1) I have actually seen units being rented out under similar conditions. Provided the county, or local authority, does not flag the property or otherwise indicate that it is not ready for occupancy, the property can be rented to a tenant.

2) Obviously, if the property is in poor condition or being remodeled, renovated, or rehabbed, the FMV will be adjusted accordingly. In other words, a property with a FRV of $1,000/month in perfect condition might have a FRV of $500 in poor condition (or in the process of undergoing renovations); FRV is always relative.

[bob_brown]

@tagteam ok then how do you interpret "available for rent" do you know of any IRS court cases that have set the precedent for the interpretation of "available for rent"

[bob_brown]

@tagteam my contention is why even state the first sentence it is not even needed if the second sentence all but eliminates it.....you can read that 5 different ways.  HELD it for rental purposes.....that is past tense so in the past you HELD it for rental purposes now you are selling it and therefore you can write of the rental expenses.  The second sentence does not even line up with PUB 527 for depreciation that clearly states that that ends when the property sells.  

Retired From Service
You stop depreciating property when you retire
it from service, even if you haven’t fully recovered its cost or other basis.

You retire property from service when you permanently withdraw it
from use in a trade or business or from use in
the production of income because of any of the
following events.
• You sell or exchange the property.
• You convert the property to personal use.
• You abandon the property.
• The property is destroyed.

[bob_brown]

@tagteam @ColeenD3 do tax attorneys ever read these threads?  I hope so......I would like one to chime in on this issue.  I would suppose unless I used my house for personal use it is still a rental property until then or until it is sold.  If for some reason it cannot be rented out due to the condition then yeah its not available for rent then it is an investment property or personal property.  I guess at that point you need to put it on schedule A if it is deemed a personal property or second home.