Sale of rental property / expenses between rental and sale

6 Replies

I have read IRS publications and scanned forums but can't find a direct answer to my very specific questions.  I sold a rental property last year.  The IRS says "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 is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses."  That's fine, I understand expenses for the interim period are not deductible on Schedule E.  Specific questions:

- Are those expenses in fact allowed to be capitalized as selling expenses?  It seems the answer must be yes.

- Would this require a 266 election?  If so, is there an issue making this election for only a portion of the year for the property, since it was a rental part of the year with expenses deducted on Schedule E.  I want to elect to capitalize expenses from the time it was taken from rental service until the time it sells.  That's allowed, right?  Do I need to so state in the election?  Do I even need to make the election?

- I don't know whether this matters, but I am a "real estate professional" and also file Schedule C.  

Thanks in advance for any clarity.

@Janet Valdivia

You can capitalize them as selling expenses. No 266 election is needed, it does not apply here.

And frankly, you can deduct them on Sch E, too - same result basically. The rule was intended to prevent someone from deducting holding costs and depreciation on a vacant dilapidated unlivable property for several years in a row while hoping someone will buy it. Not for a few months after the last tenant moved out and before sold - which I assume to be your situation.

Thank you @Michael Plaks , that completely makes sense to me, but since they explicitly state that I can't deduct as rental expenses since I didn't advertise for rent while trying to sell (which few people would do if they were really trying to sell), I wanted to make sure I wasn't missing anything.  I do my own taxes, and they've grown quite complex over the years as I've incrementally added new scenarios.  This is the first time I've decided to sell a rental, so had to learn a few things. =) 

I have a related question.  Tenants just moved out of a house that I've been renting out for 12 years, and I'm planning to sell it and do a 1031 exchange to buy a multi-family property if I can find one.  This is the first time I've done a 1031 exchange. The house needs new carpets, which would have been an improvement and depreciated if the house was still an active rental, as well as a number of repairs, and there will be additional expenses such as utilities, landscape maintenance, mortgage interest, etc. until the house is sold.  Since the house is vacant in preparation for sale, how should I handle the expenses?  Michael indicated that it would be acceptable for the expenses to be deducted on Schedule E, although I think technically they should be added to the cost basis or as a cost of sale.  Is that right?  Should the carpets be handled differently than the repair/maintenance expenses since they are an improvement?  Since I'm trying to do a 1031 exchange, if any expenses are added to the cost basis or cost of sale, I won't get to deduct any of that expense in the tax year of the sale, since capital gains are deferred, correct?