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December 16, 2019
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Expenses of unsold investment property

  • December 16, 2019
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I bought a property in 2018.  I have not rented it and have been making improvements on it while also trying to sell it.  As of this date, it still has not sold.  Am I allowed to deduct expenses such as cleaning/maintenance, insurance, mortgage interest, repairs, taxes, and utilities?  Would these deductions be deducted from my ordinary income since I have no rental income? 

    Best answer by DanielV01

    It depends, but you likely have nothing to deduct until you sell.  The main factor is that it seems you have not attempted to rent the property, and you purchased it as an investment.  Most investments are subject to Capital Gains treatment.  Under this provision, your expenses related to your property are considered adjustments to basis, which will have the effect of reducing the gain (or even contributing to loss).  If you bought the property as a pure investment (no rental, and not purchased to be a primary home), then you do not claim any expenses when they are incurred on the tax return.  Rather, you add all of them up and total with the amount paid for the property (plus taxes and other closing or related fees).  That total is subtracted from the eventual sales price to determine gain or loss.  The character of the gain (short or long term) will be determined then by the original purchase date.

     

    However, if you are in the business of flipping houses (which usually is the case if you are working on more than one investment property to improve/restore and sell), it is not considered to be capital gains but rather self-employment.  In this case, the house itself and the related repairs go to inventory, which then is "cashed in" when the house is sold.  Maintenance expenses (such as cleaning and utilities you pay) could be deducted on Schedule C if the house does not sell in the year. (which would produce an amount of loss that reduces ordinary income).  However, keep in mind that this would also produce additional self-employment profit which is subject to self-employment taxes  (essentially Social Security and Medicare payments).  

     

    If you actually rent the property (or make it available for rent), then it falls under rental income rules.  Expenses incurred prior to being available for rent are totalled and capitalized for depreciation as the property's basis, and expenses incurred after being available for rent are deducted against rental income.  If a loss is produced, you can claim loss subject to Passive Activity Rules (which are income driven).  

     

    This is a high-level review.  If you have specific questions related to your situation, feel free to ask them.  Please do not provide any personal information in this Forum, however.

     

    1 reply

    DanielV01
    DanielV01Answer
    Employee
    December 16, 2019

    It depends, but you likely have nothing to deduct until you sell.  The main factor is that it seems you have not attempted to rent the property, and you purchased it as an investment.  Most investments are subject to Capital Gains treatment.  Under this provision, your expenses related to your property are considered adjustments to basis, which will have the effect of reducing the gain (or even contributing to loss).  If you bought the property as a pure investment (no rental, and not purchased to be a primary home), then you do not claim any expenses when they are incurred on the tax return.  Rather, you add all of them up and total with the amount paid for the property (plus taxes and other closing or related fees).  That total is subtracted from the eventual sales price to determine gain or loss.  The character of the gain (short or long term) will be determined then by the original purchase date.

     

    However, if you are in the business of flipping houses (which usually is the case if you are working on more than one investment property to improve/restore and sell), it is not considered to be capital gains but rather self-employment.  In this case, the house itself and the related repairs go to inventory, which then is "cashed in" when the house is sold.  Maintenance expenses (such as cleaning and utilities you pay) could be deducted on Schedule C if the house does not sell in the year. (which would produce an amount of loss that reduces ordinary income).  However, keep in mind that this would also produce additional self-employment profit which is subject to self-employment taxes  (essentially Social Security and Medicare payments).  

     

    If you actually rent the property (or make it available for rent), then it falls under rental income rules.  Expenses incurred prior to being available for rent are totalled and capitalized for depreciation as the property's basis, and expenses incurred after being available for rent are deducted against rental income.  If a loss is produced, you can claim loss subject to Passive Activity Rules (which are income driven).  

     

    This is a high-level review.  If you have specific questions related to your situation, feel free to ask them.  Please do not provide any personal information in this Forum, however.

     

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    Employee
    April 21, 2020

    After probate closed  in 2018, we inherited a property.

    The FMV at the date of death in 2017 has been determined.

    It is not a rental since it needs repairs.

    It has carrying costs (utilities, insurance, HOA fees) in preparation to sell.

    It is not a second home, and thus it is a investment property. 

    So when the investment property sells in 2020,

    can the costs of repairs (paint, carpet, dry rot repair, etc)

    and the carrying costs (HOA fees, utilities, insurance), for each year, after probate closed in 2018,

    be added to the date of death FMV, as the new adjusted basis, when we file our tax return in 2021?