Rental property converted back to primary residence after two failed sales

Forum|Forum|1 year ago
January 19, 2025
1 reply
0 views

Hello Experts,

I have (had) a rental property (last tenants lease ended 3/31/24) that I decided to sell. I did some work on the house to prep it for sale and listed it for sale on April 18, 2024. I received two offers but both fell through for various reasons. After the second sale fell through I decided to move back in (September 5, 2024) and make it my primary residence again. Here are my questions:

1. When does the rental depreciation stop, 4/1/24 (after lease ended) or 4/18/24 when it was listed for sale or 9/5/24 when I moved back in (Pub 527 Idle Property and Retired from Service)

2. Can I deduct any expenses related to the sale prep since it never sold, would it still have been considered a rental during that time (Pub 527 Vacant while listed for sale)?

3. I received due diligence money with each sale offer which the prospective buyers had to forfeit. Is that money considered ordinary income or capital gains?

Thank you!

Not A Product Question

MindyB

The rental depreciation should stop on the day you decide to convert the investment property into a primary residence. ‌The date of move-in (9/5/24) is likely after the decision was made to cease seeking a buyer.

Yes, you can deduct the expenses related to the sale preparation as it was still considered an investment property at that time. Keep in mind these expenses may be limited because of passive activity loss rules, and the fact that the property wasn't disposed of. ‌If you are in the situation where you have losses, I would suggest reviewing this article: IRS Form 8582: Calculating Passive Activity Losses for Real Estate.

The receipt of due diligence money is considered ordinary income. For this to be reportable as a capital gain on Schedule D, the rental home would need to be a capital asset. ‌The IRS specifically excludes depreciable property from its definition of a capital asset in Section 1221(a)(2). In order to report this in TurboTax, navigate to Federal; Wages & Income. Scroll to the bottom of the page and choose Less Common Income. Lastly, choose Other Reportable Income, then enter a brief description and the amount.

jsm_tt25Author

Thank you very much Mindy, that was very helpful!

I have another question related to the depreciation of remaining finance fees.

-2012 refinanced GMAC loan with GMAC: When I edit this asset to indicate i have converted to personal use it states I have $474 of refinance fees from my prior loan which can be used as an expense this year as long as the new loan was not with the same bank. What do I do with the $474 since the refi was with the same bank as the original loan?

-2015 I refinanced the loan (GMAC became Ocwen) with Capital One. When I edit this asset do the remaining refi fees get used as an expense since it was a different bank?

Here are the instructions from TurboTax:

Remaining Refinance Fees with the Same Lender

Charges paid by a borrower to get a mortgage refinance for a rental must be amortized over the life of the loan. In the year you refinance to a new loan (and retire the prior loan), any existing refinance fees from any prior refinances become an expense unless the mortgage is financed with the same lender. If you used the same lender for the refinance, the unamortized fees on the first loan must be deducted over the term of the new loan.

How Do I Do This in TurboTax?

Points and other mortgage refinance fees are entered in the same area of interview where you track the depreciation of your rental property, or rental furnishings. Go to the Asset/Depreciation topic and select the new loan fees you entered for your new loan. Add the remaining fees to the cost of the new loan fees.

Does this last statement in bold mean I add the $474 from the first refi to the second refi and then all of that amount gets used as an expense?

Thank you!

PatriciaV

Employee

Yes. The remaining unamortized fees are assigned to the new loan (with the same lender). If you paid refinance fees for the new loan, add the balance from the old loan to the new fees. Amortization will be calculated on the total and is reported as an expense each year.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"