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Improvements/repairs to rental property prior to sale

Forum|Forum|6 years ago
June 5, 2019
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I have a rental property which I leased out for 9 months (Jan - Sep) of 2016. The tenants moved out (30 Sep) and I spent the next ~2 months making repairs to prepare the house for sale ($4500 for new carpet, $1350 to fix a brick patio, $1850 paint, $230 in yardwork, and miscellaneous expenses for cleaning supplies, furnace annual check, carbon monoxide detectors, etc.) . The house was listed for sale in December and went under contract in January.

I have read information stating that some items are improvements (added to cost basis of house) and some items are repair (deduction?). Making matters more complicated is that I just sold the house in March 2017 after making more repairs ($1100 radon reduction installation, $370 plumbing repair) in 2017.

Should I list all expenses in their appropriate year and how should I categorise the expenses?

TurboTax Premier Online

Best answer by AnnetteB6

Unless you continued to advertise and hold the property available for rent after the tenants moved out, it ceased to be a rental property between that time and when it was sold.

If it is no longer a rental property, the expenses that you incurred are personal expenses and not rental expenses. The improvements that you made to the property would be added to the basis and would be taken into account on your 2017 tax return when you report the sale of the property. The expenses for repairs or supplies are personal expenses and would not be deducted or added to the basis.

If the property did continue to be a rental property, then you would claim the repairs and supplies as an expense on Schedule E for the year in which they were paid. Improvements would be entered as a depreciable asset (carpet for example) placed in service when they were installed.

A

AnnetteB6Answer

Unless you continued to advertise and hold the property available for rent after the tenants moved out, it ceased to be a rental property between that time and when it was sold.

If it is no longer a rental property, the expenses that you incurred are personal expenses and not rental expenses. The improvements that you made to the property would be added to the basis and would be taken into account on your 2017 tax return when you report the sale of the property. The expenses for repairs or supplies are personal expenses and would not be deducted or added to the basis.

If the property did continue to be a rental property, then you would claim the repairs and supplies as an expense on Schedule E for the year in which they were paid. Improvements would be entered as a depreciable asset (carpet for example) placed in service when they were installed.

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D

dlanigan4Author

Thanks, Annette B. I did not advertise the home as a rental after the tenants moved out.
So is only the installation of new carpet considered an "improvement" whilst all other expenses (repairing of brick patio, landscaping, painting, plumbing repair, cleaning supplies) are considered "repairs" for the non-rental. Is that correct?
Do you know the category for the radon mitigation system?

Carl11_2

Employee

Captial improvements done after the last renter moved out and before the property was sold, are entered in the assets/depreciation section. However, since the capital improvement was "never" place in service, you have to enter it a bit differently so that it does not get depreciated, yet still adds to the cost basis of the property.

What you have to do is classify the improvement as "rental real estate". Then enter the amount you paid for that improvement in the COST box, and the same exact amount in the "COST OF LAND" box. Since land is not depreciated, that will cause the program to "NOT" take any depreciation regardless of what you enter for your "in service" date.

Just make sure you describe the asset for what it really is. Then since the program will "force" you to enter an in service date, just make that date the date of your closing on the sale.

Carl11_2

Employee

Oh one more thing. For business use percentage I don't think the program will allow a zero percent business use. But I think it will allow 0.1 or 1% business use. So don't leave that business use percentage at 100% since it was never placed in service.

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QIronbane

Hi Carl, Another thing in regard to this "Rental Real Estate" asset is that I will need to have it "sold" in the sale of the rental property. But somehow Turbo Tax does not give you the option of having this assets sold after adding it. You have the option to have all other assets sold. Pretty Strange?

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apdickinson

In the example above is sounds like the owner had this as a primary res.

In my situation the house was my primary res at one point, I moved out and have a new primary res out of state. I rented the house for 5 years. Tenants moved out in July and I did repairs over 3 months and sold the property.

I did a whole house painting - $9K, had to repair the hardwood floors $6K and had other assorted repairs $7K and my travel to do work on it $2K.

I assume I would apply repairs first against the rental income... and the remained as an increase in the cost basis of the home?

Carl11_2

Employee

did a whole house painting - $9K, had to repair the hardwood floors $6K and had other assorted repairs $7K and my travel to do work on it $2K.

If all the above was done within a reasonable time frame, and if it was all done after the last renter moved out, it could all be lumped together as a property improvement which would add to the cost basis of the property. At least, that's the way I would do it.

Using your numbers, that would increase my cost basis in the property a good $24K thus reducing my taxable gain on the sale by that much. I also assume you have the receipts and paperwork to prove that total if audited on it.