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Old 03-30-2017, 02:04 PM
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Question Sale of house with gains - non-rental


I am posting this in the homeowner section because the house described in this thread was never rented.

We bought a fixer-upper in 2013 for a low price with the intent for a family member to live in, and began a complete renovation of it. Due to changing circumstances, the family member never occupied the house. Seeing this, as we continued the renovation, we decided we would make it a rental once finished.

A career opportunity caused us to move to a neighboring city in 2014. Progress on the house slowed to a crawl. As it neared completion, we put the word out among a few people that it would be available to rent soon, but did not place any formal advertisement. We finally finished the renovation in late 2015.

Meanwhile, we wanted a larger house for ourselves in our current city, and were having difficulty obtaining a mortgage because, despite owning two houses out right with no mortgage, they counted against our debt/income ratio, and finding a tenant would not fix the problem because the tenant would have to have been there for two years. So for the sake of simplifying our lives (not having a rental in another city), freeing up capital for a down payment/smaller mortgage, and being able to obtain a mortgage, we put the house on the market as soon as it was completed in late 2015. We sold the house in March 2016, for a profit.

I am confident that this house counts as an investment, as opposed to our being house flippers because we did not buy it with the intent to sell it and this is our only such instance (and we owned it for 2 1/2 years). I also don't feel that I can say it was ever made available as a rental, because as soon as it was actually completed, we listed if for sale and not for rent. So now I have to figure out the capital gain on this house.

We have the sums of everything we spent on the renovation -- materials, labor, etc. No problem there.

My question is this: Can the property taxes, utilities and insurance (homeowner's insurance - there was no mortgage) be counted toward the basis? I have read in one place that if the house is an investment they can be counted toward the basis, but when it is held out as a rental they are expenses on Schedule E. On the other hand, I have been told that either way I should have filed Schedule E the past two years and counted them as expenses; however I did not think I could do that because the house was in the middle of renovation and was not being held out as a rental. I thought you could only do schedule E if it was being put out as a rental.

What do I do in this situation? Can I add my real estate taxes, utilities and P&C insurance costs to the basis? Or do I have to amend my last two years' returns by adding a schedule E to count them as expenses? Or something else?

Thank you so much!

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