Hello all! I have a somewhat gnarly situation with a rental property. My wife and I lived in a house in Maryland for 13 years, then moved to California in August of 2014. We had tenants living in the house from August 2014 to July 5, 2015. We then put some work into the house, put it on the market and sold it; closing date was October 26, 2015. So, because we lived in it for more than 3 of the last 5 years, we won't owe capital gains taxes on the sale (our profit was under $250K).==========> To qualify for the $250K /$500K home sale exclusion, you must own and occupy the home in Maryland as your principal residence for at least 2 years before you sell it. As long as you have at least 2 years of ownership and 2 years of use during the 5 years before you sell the home, the ownership and use can occur at different times.
I'm now trying to figure out what I can and can't list as losses on my Schedule E for 2015.=====>Correct you need to report rental income and rent related expenses on Sch E of 1040 to your 1040 tax return. You need to report rental income on lines 3a, 3b and 4.And, then subtract all of your expenses on lines 5 through 19 to generate a total profit or loss that's listed on line 26. You may claim a number of different expenses against your income, and certain expenses like depreciation don't require spending money on your property.
Some things are obvious: I can list repairs and maintenance we did while the tenants were in the house. But there's also:
*Work we had done after the tenants moved out but before we listed the house===>I guess in this case, unless your work was done for rental purposes, you may NOT claim repairs on your primary home; Repairs to your personal residence are never tax-deductible.Capital improvements, though, can reduce your taxes in the long run by increasing the adjusted basis of the home..
*Work we had done after the house was under contract but before we closed, because it was requested by the buyer======> As mentioned above.
This was work that falls under the heading of "repairs and maintenance" rather than "improvements" -- fixing some wonky electrical work, reinforcing the wobbly back deck, repairing and resealing scuffed hardwood floors, stuff like that. Can I deduct any of these costs?======>As same above.
How about the cost of the electric/gas bill for the period when the house was vacant?======>>No;however, If the house was available for rent, then, you can write off expenses on your taxes, even when it's empty.
Next is the question of expenses that can't easily be assigned to a precise time period -- mortgage interest, property taxes, homeowner's insurance, and the water bill. For 2014, we deducted on schedule E a percentage of these equal to the percentage of the time the house was a rental. =====>>Correct; as you converted your primary home to rental pty, you must divide the expense for the year of 2014 of convention between the two uses. Rental use begins when the pty is offered for rent. You deduct the rental portion of the expenses against RENTAL income. And you can deduct the personal portion of the interest and taxes as itemized deductions on Sch A of 1040.
I assume we'll do something similar for 2015, but I'm not sure what the percentage should be. 50%, because the house was a rental for six months out of the year? 60%, because we owned it for ten months and rented it for six? Something else?=====>>I guess it is 60% as you said you owned it for 10 months and rented it for 6; for 2015, you rented it out from jan-june, so you can deduct 50% of the annual expenses, real estate taxes, insurance, deprecation against the rental income of 2015.
Then there's the issue of depreciation. My accountant put depreciation on Schedule E for 2014. I know depreciation lowers your basis and ultimately increases the capital gains tax you'd have to pay once you sell the asset. But since we won't have to pay capital gains on the home sale, this feels a little like getting something for nothing. Can I list depreciation for 2015? Was it a mistake to do it for 2014?===========>>> you won't have to pay capital gains on the home sale; however, UNLESS you take a loss on the primary home sale, you still need to recapture the sec 1250 depreciation expenses taxed during 2014 as ordinary income taxed at flat 25%. Aslongas you sell your asset for more that its depreciated value, the IRS requires you to pay it tax on that gain. This tax is called "Depreciation Recapture Tax" and is also referred to as Section 1250 recapture.
Finally, there's the question of costs directly related to the sale of the house -- realtors fees, property transfer taxes, etc. It seems like these might be count as a cost associated with the rental home, and so potentially deductable, but at the same time since I'm not paying capital gains tax on the sale of the house, my bet is they aren't======>> Those real estate expenses are added to the adjusted basis cost of the house and decrease your LTCG so you don't have to pay capital gains on that