Rehabbing & repairing rental then selling: can I deduct cost of rehab & repairs?

[bfrboulder]

I have a rental (have owned and rented for 15+ years) that was trashed by my last tenant.  For some reason, this rental attracted the "trasher" tenants even though it is a pretty nice SFR, so while I was repairing the place, I decided to sell it.  I am now in the process of doing some improvements (i.e. granite tile kitchen counter top instead of Formica) to get it ready for sale in this down market.  I don't plan on re-renting it again.  Can I still deduct all of the repairs and maintenance work? Can I get any sort of tax break for the improvements (such as, add the improvements to my basis to reduce my gain) if I don't rent it again?

[Bluemoon06]

You are correct.   The repairs go into the basis if you are selling.  You also have to recapture depreciation.

[Milwaukee]

Serious question here:

I thought after 2 years if you sold your home you were not taxed on any appreciation and or gains?  Is that only primary residence?

[justin0419]

You have to have lived in that house for at least two out of the last five years for that to work.  You can't just buy a house, fix it up, let it sit for two years and then not pay taxes on the gains.

[Milwaukee]

Then I am all good.

I have just about lived here for 2 years. It will probably be another year before it's ready to be sold.

[bfrboulder]

Thanks Bluemoon06.  For clarification, do only the repairs get to be added to the basis (the improvements aren't applied to the basis, and none of the work (repairs/improvements) gets to be deducted from income)? - or, do the repairs get to be deducted from this years' rental income and the improvements go into the basis?

[user120203]

Say the renter holes some walls and doors and damages the tile in a shower. Those repairs are expenses. While I'm in there, if I decide to remodel the bathroom instead of repairing the shower tile, then that improvement is added to my basis, irrespective of what the shower repair would've cost.

That basis either continues to be depreciated as long as the property remains a rental or becomes the basis for capital gains taxes, presuming no Section 1031 exchange.

So, for example, I buy the house for 50K, have depreciated it to 40K and the bathroom remodel costs me 5K and repairs to the walls and doors cost 1K. The 1K is expensed against rental income for the current year. Say I sell the house for 60K net (after costs of sale) in the same year. My basis would be 40K (the depreciated basis) plus the 5K I spent to remodel the bathroom, or 45K total. I'd owe capital gains tax on 15K (60 - 45).

[mcwagner]

@ 120203: plus ordinary income tax on the 10k of depreciation you have to recapture.

@ Milwaukee:  if you are living in the property, repairs are not deductible and increases to basis are probably irrelevant, since the first 250k of gain is excluded since you have lived there for 2 years.

If you converted a residence to a rental, then the math changes somewhat.