Selling Former Home, Now A Rental


M

ML

Two years ago I moved to a new home and decided to rent out
my old house, which had been my primary residence for 8
years before that. Now I am selling the rental house. I
should be able to exclude up to $250K in capital gains from
that sale since it was my primary residence for 3 out of the
past 5 years, but I'm not sure how to handle some of the
expenses. The tenants moved out at the end of August. Can
I continue to treat the house like a rental property right
up until it is sold? Specifically:

- How do I treat the mortgage interest for the period
between when the tenants moved out and when I sell the
house? Can it still be considered a rental expense, or does
it go back to being mortgage expense on my Schedule A since
I am selling the house as though it was my primary
residence?

- After the tenants moved out, I discovered some sprinkler
system problems that needed repair, and I also spent some
money on improving the home to make it look better for sale.
Can any of those be deducted as rental expenses? Or can
they be deducted as a selling expense?

Thanks for your help.

Mary
 
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J

John H. Fisher

Two years ago I moved to a new home and decided to rent out
my old house, which had been my primary residence for 8
years before that. Now I am selling the rental house. I
should be able to exclude up to $250K in capital gains from
that sale since it was my primary residence for 3 out of the
past 5 years, but I'm not sure how to handle some of the
expenses. The tenants moved out at the end of August. Can
I continue to treat the house like a rental property right
up until it is sold? Specifically:
****The day you take the rental out of service, as a rental,
is the date on which you longer may take expenses on the
rental property. If the property were available for rent,
you tried to rent it (but couldn't), as long as it were
available as a rental, your expenses (including
depreciation) would continue to be deductible.
- How do I treat the mortgage interest for the period
between when the tenants moved out and when I sell the
house? Can it still be considered a rental expense, or does
it go back to being mortgage expense on my Schedule A since
I am selling the house as though it was my primary
residence?
****You would apportion your interest and taxes. Expenses
related to the rental (while it was a rental) are deductible
on Schedule E of your tax return. Expenses that are not
associated with the rental (but only taxes and interest) are
deductible on Schedule A (Form 1040) "Itemized Deductions".
Improvements, after the property is taken out of service as
a rental, are added to your basis in the property.
- After the tenants moved out, I discovered some sprinkler
system problems that needed repair, and I also spent some
money on improving the home to make it look better for sale.
Can any of those be deducted as rental expenses? Or can
they be deducted as a selling expense?
***As stated in the above paragraph, these expenses are
added to your basis.

***Upon sale, you'll have to do the calculations to include
what is not excluded from taxation. You'll have to pay tax
on the depreciation which was allowed/allowable.

If, during the 5-year period ending on the date of sale, you
owned the home for at least 2 years and lived in it as your
main home for at least 2 years, you can exclude up to
$250,000 of the gain ($500,000 on a joint return in most
cases). However, you cannot exclude the portion of the gain
equal to depreciation allowed or allowable for periods after
May 6, 1997. This gain is reported on Form 4797. If you can
show by adequate records or other evidence that the
depreciation allowed was less than the amount allowable, the
amount you cannot exclude is the amount allowed. Refer
toPublication 523 , Selling Your Main Home and Form 4797
(PDF), Sale of Business Property for specifics on
calculating and reporting the amount of the eligible
exclusion.

If the links do not appear, you may download the forms &
publications from http://www.irs.gov

Hope this helps 'n' Good Luck!!=:)

"Jack" - John H. Fisher - (e-mail address removed)
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=:)
 
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M

ML

Thanks to John for his comments. I have some clarifying questions.

John H. Fisher said:
Improvements, after the property is taken out of service as
a rental, are added to your basis in the property.
***As stated in the above paragraph, these expenses are
added to your basis.
You commented that improvements are added to the basis, but
I am talking about repairs, not improvements. Would they
still be added to the basis?

I also saw a section in Pub. 527 titled "Expenses for rental
property sold" that says "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." That seems to say that the
sprinkler repair should be deductible as a rental expense.
Am I interpreting this correctly?

I'm also not sure how to interpret "ordinary" expenses here.
I just got the pest inspection back on the house, and
discovered that there is about $3400 worth of work needed on
the house in order to clear Section 1 items on the pest
report. This includes things like replacing siding and trim
damaged by dry rot, adding a vapor barrier under the house,
replacing water-damaged subflooring in the bathroom and
putting new vinyl flooring back in afterwards, and replacing
a sliding door to the back yard that has apparently been
allowing water to get in and damaging the subfloor near the
door. These are definitely necessary for conserving or
maintaining the property, but are they ordinary expenses?
If I cannot deduct these as rental expenses, can they be
deducted as a selling expense? The money for the repairs
will be paid from the house proceeds in escrow, so the net
amount I will receive at close of escrow will have this
deducted from it.

Thanks again for any assistance.
 

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