Rental Real Estate

[mcb39]

I am pretty sure that my client can take a rental loss even though he was unable to rent the unit for any part of the year. However, cannot find the answer in black and white. It has been a rental unit for several years. He advertised it for rent. He maintained the property but did not use it for any personal purposes. He did not raise the rental rate that he had always charged, but has been unable to find a renter and the property is vacant. Can he deduct the loss against his earned income? Thanks to anyone who can clear my muddy mind.

[Pacun]

As long as the unit was ready to be occupied and advertised for renting AND he was active participant, he can deduct losses.

[GeneInAlabama]

But...for several YEARS? Something doesn't seem quite right. Is he really trying to rent it, or could he be using it for a tax write-off?

[Tax Prep by Deb]

But...for several YEARS? Something doesn't seem quite right. Is he really trying to rent it, or could he be using it for a tax write-off?

I believe the reference to several years was to indicate that it had been rented in the past, this is the first time it was not rented for the entire year.

I could be wrong, but that is how I would interpret the original post.

Deb!

[GeneInAlabama]

After re-reading the original post, I believe you are right. It sure is easy to jump to conclusions. :)

[mcb39]

After re-reading the original post, I believe you are right. It sure is easy to jump to conclusions.

Deb had the correct interpretation. The apartment has been rented for as many years as I have had him as a client. He advertised heavily this year, but no takers. Thanks to all for your input.

[kcjenkins]

While I'd be advising him to look into spending a little more to sharpen up the place, I'd have no problem at all taking the deduction given the facts as listed.

[the boss]

I have situation at hand and would like your input on how to handle it. I came across this post that touches some of the issues, but would like your input on others I have outlined below.

Thank you in advance for your help.

As long as the unit was ready to be occupied and advertised for renting AND he was active participant, he can deduct losses.

What happens in a situation where landlord does not have the property ready for occupancy due to a major refurbishment of the property? Do you loose all expenditures made during the year (taxes, interest, insurance, etc.?) Let's say the property was rented out for the first two months of the year and then went through a lengthy refurbishing that took the remainder of the year. Do you pro-rate taxes, interest, insurance, etc.? How do you treat the expenditures of the rehab that were paid in the year the property was out of commission? How about if the rehab went into the following year? Would the total cost of the rehab be depreciated on the following year's tax return, or could you split the items as they were completed, such as a bathroom, kitchen, tile installation etc. as they were completed?

[jainen]

>>major refurbishment of the property<<

I would expect such expenses to be capitalized and depreciated over 27.5 years (assuming residential) starting the month it is returned to service. That would include ongoing expenses such as utilities and mortgage interest incurred while the property was not available. You have a bit of flexibility since there isn't any definite statutory time frame to leave the rental vacant; just be reasonable and it should be fine.

In the original post, the owner did not adjust his rates to reflect current market conditions. Whatever his reasons, after several months it begins to look like the property is not actually available in any real sense. At least by the second year I would hesitate to treat it as a rental property.

[the boss]

Jainen, thank you for your quick reply. You answered a part of my original post. How about this situation -

Let's say the property was rented out for the first two months of the year and then went through a lengthy refurbishing that took the remainder of the year. Do you pro-rate taxes, interest, insurance, etc.?

Thanks

[kcjenkins]

No need to prorate those, they would be deductible in year paid. You are simply going to capitalize the repair expenses. You could, however, if you wish to, make the election to capitalize the property taxes, pursuant to IRC §461©. You will find that election on the General tab of the Elections form.

[Terry D EA]

I agree with the responses to the boss question. I also agree with the responses to the original post. As long as the property was available for rent then the losses are deductible. However, it is note worthy that the loss of rental income is not.