Sale of rental property following demolition

Forum|Forum|1 year ago
March 23, 2025
1 reply
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I had a multi-unit rental property that I purchased over 25 years ago. At least ten years ago it fell into disrepair and I gave up trying to rent it out. It's basically been sitting empty for the last ten years. I've been paying the property taxes and that's it. Since it technically wasn't "available to rent" I haven't even listed it on my tax return, nor have I deducted any of those taxes I've been paying.

In 2024 I paid over $40k to have the unit demolished and sold the land for $1. I know I can add the demo costs to the original land basis. But can I include the property taxes I've been paying these last ten years?

Best answer by DianeW777

Your suggestion is a completely different path than that suggested by DianeW777. If I enter the transaction under Sale of Business Property (as Diane suggested) it asks for the original basis, improvements, and depreciation taken. The results land on Form 4797 as a Sale or Exchange of Property Used in a Trade or Business. If I go the other route as an Investment Sale, it doesn't ask for improvements or depreciation.

I should probably clarify, I have been retired for several years and spend most of my time maintaining numerous rental properties, all of which I classify as QBI. I'm thinking this may allow me to report the transaction on Form 4797 since my main business is rental properties?

The sale should be shown on Form 4797 because that is where it belongs due to the rental use of the multi-unit. Follow the steps provided earlier so that your sale falls to the 4797 first. From there it could land on Schedule D or directly on Form 1040, depending on gain and/or loss. Posted below for your convenience.

Sale of Business Property:

Income and Expenses at the top
Scroll down to Other Business Situations
- For TurboTax Desktop: Business Income and Expenses > Less Common Business Situations
Select Sale of Business Property
Select Sales of business or rental property that you haven't already reported.
Answer 'Yes' to Do all of the following apply...?
Enter your sales information:
1. Description of the Property (Machine Type)
2. Sales Price/Sales Expenses
3. Date acquired and date sold
4. Cost
5. Depreciation

@Deb3805

DianeW777

No, you cannot include the property taxes you have been paying the last ten years because the property was not an active rental. The multi-unit rental property has been out of service, which is automatically considered converted to personal use for a period of 10 years because it's been sitting empty without making it available for rent.

You can add the $40,000 paid to demolish it as a part of your cost basis. Add that to the original cost and any capital improvements in the early years. Next find or calculate all depreciation allowed prior to you taking it out of service. Next you will report a sale of business property using the steps below.

Sale of Business Property:

Income and Expenses at the top
Scroll down to Other Business Situations
- For TurboTax Desktop: Business Income and Expenses > Less Common Business Situations
Select Sale of Business Property
Select Sales of business or rental property that you haven't already reported.
Answer 'Yes' to Do all of the following apply...?
Enter your sales information:
1. Description of the Property (Machine Type)
2. Sales Price/Sales Expenses
3. Date acquired and date sold
4. Cost
5. Depreciation

NOTE: If the land was sold to a relative, the loss is not allowed to be used. If the land was sold to an individual who was not related to you, then the loss will be allowed.

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Deb3805Author

Thanks for the quick reply! I did not sell to a relative so that means it’s a long term capital loss, right? Does that mean I can only offset the loss against capital gains?

PatriciaV

Employee

Yes, capital losses offset capital gains. Plus, you may deduct up to $3,000 of capital losses each year. Any excess loss is carried over to future years. You are required to take the allowed amount of capital losses each year until they are used up. TurboTax makes this calculation for you and reports the necessary loss on Schedule D.

Per IRS Tax Topic 409: "If your capital losses exceed your capital gains, the amount of the excess loss that you can claim on line 13 of Form 1040 to lower your income is the lesser of $3,000, ($1,500 if you are married filing separately) or your total net loss shown on line 16 of the Form 1040, Schedule D (PDF), Capital Gains and Losses."

Read more here: What is a capital loss carryover?

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