Rental and Schedule E

Facts and circumstances -- to what do you attribute a year-long wait to find a renter? Were similar rental properties also typically vacant for a year or more in your area? Did you reject any applicants? Did you consider Section 8 tenants?

Also, in some places, such as California, renters must be given adequate notice (30-60 days) before you can kick them out to sell a property. Was the property truly available for rent, knowing that you might receive a purchase offer at the same time you were reviewing tenant applications?

I am surprised that a real estate agent would leave a property on the MLS for a year.

Obviously, lots of folks would like to "have their cake and eat it too" regarding deduction of personal expenses while vacant property is up for sale, so you should have good records to show your status as a landlord before you deduct rental expenses against no rental income.

If it was truly available for rent, yes.

Residential rental real estate is 27.5 years straight line depreciation from date placed in service as a rental.

Depreciation applies to the building including additions or improvements, but not the land. Appliances and furniture, if any, are also depreciable under MACRS. Your depreciable basis in the building is the lower of fair market value (FMV) or cost at the time it was placed into service, so if the market value had declined, you need to take that into account. If you did a kitchen remodel after you moved out, that would argue in favor of the property not being available for rent during the period of the remodel.

Of course, the depreciation allowed or allowable will probably come back in the form of taxable gain which cannot be excluded under Section 121 and which does not get the most favorable capital gain treatment when you sell the property. This is the section that says if you owned and lived in the house for at least two years, you have up to three years after you move out to sell it and exclude up to $250K ($500K MFJ) in gain.

See IRS Pub 527 for more details on rental property.

-Mark Bole

wrote

Since you had it up "for sale / for rent" during the year, at what point in time did you know you had the renter in place and you were headed that direction over selling it? That's your rental start date, most likely late in 08. That's also probably about the time you told the realtor to pick up their signs. Everything rental related starts on that date, the date you took it out of "for sale" status and started using it for rental purposes.

Painting would be a fixing-up expense, and the fixtures would be improvements that would have added to basis on a sale, and I would take it as a basis increase to be depreciated as rental.

Ok, I see your point. Here's the time line:

Jan 1 2008, my house was listed on for sale on ForSaleByOwner.com and on the MLS. It was not listed for rent but I would offer it for rent to people that called to inquire. July 1 2008, I signed up with a full service realtor (Baird and Warner). The house was listed for sale on the MLS. I told my realtor that I would rent it to someone with a good credit history. The Baird and Warner contract I signed stated that if the property was rented, I would have to pay a finder's fee (one months rent). Oct 15 2008, tenant visits my house during an open house, tenant undecided at this point. Dec 1 2008, house is entered into the MLS as a rental to get more exposure (tenant still unsure). Dec 10 2008 tenant signs paperwork to rent. Jan 1 2009, tenant moves in.

How about using July 1 2008 at the date when the "property was placed in service"? That was the point I was really pushing for a renter while the property was listed for sale. I had rejected a few applicants but I don't have any records to prove.

If the property was placed in service on July 1, then I can claim 1K x

6/12 = 500, right?

I only lived in my house for 1.5 years, then moved out of state for a better job. I looked at sec 121 briefly, I didn't see anything about prorating my 1.5 years. So, if I sell my house in 10 years, I'd have to pay taxes on the entire gain plus the depreciation I've claimed? Unless I moved back in to meet the 2 out of 5 years rule?

I read Pub 527, that was a big help. I just need to figure out the FMV of my property. Assuming it was placed into service on July 1 2008, when my realtor has assessed my property at 265K. How does that break down into land and building? Looking at the numbers on my latest property tax bill, the building is assessed at 84% and the land at

16%, can I used these numbers?. That is, 265K x 84% = 222.6K at the FMV? Kooner.

Your documentation in my view supports Dec. 1st as the rental in-service date.

No. Painting paid for after rental in-service date would normally be a fully-deductible repair. The best you could hope for if paid prior to Dec 1st is to add the cost to your basis. In no case would you pro-rate it across a fraction of the year, however. (I'm assuming the paint job didn't take more than a day or two).

That no longer applies. If you move back in for the last two years, you would have to pro-rate your exclusion by the number of years of non-qualified use vs total years you owned the property. (This is a new law passed in the last year or two, there are more details of course).

Yes, as a safe harbor you can use local assessor values for land vs. improvements.

-Mark Bole

In Pub 527 (2008) Chapter 4, pg16 at the bottom under "Proper Changed to Rental Use" the second paragraph states "You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes" Then there is an example where someone starts renting June 1 and can claim 7/12 of the yearly expenses. That's why I thought my painting would be pro-rated because it is an expense too? Kooner.