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  • Financial implications for empty rental house

    Spent the fall trying to stop being a landlord but was unsuccessful.  House has been on the market since July (missed the early summer bonanza), but I am planning on taking it off the market now.  Plan is to spruce it up, minor repairs, paint, etc.  I intend NOT to have tenants, so that it is ready to go for May.

    As I am not renting it out and preparing to sell, I will have no income from the property in 2020.  Can I still claim expenses such as heat, trash, repairs?

    Is there anything else I should be asking?

  • #2
    Even though you are no longer trying to rent the house out, it did not change to "personal use", which would negate the deduction for any expenditures. You will be able to claim all as a reduction in your profit at sale or as an increase in the amount of loss, same as any other losses you have carried over. They won't go to waste, they'll just all be used at once. Keep good records, including any trips to and from the property.
    Financial planning, investment management and CPA services for physicians, dentists, and medical professionals | 270-247-6087

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    • #3
      The house was a rental house, therefore it is a business you are running. As a business, all expenses are deductible against the profits, it any. And if there are ongoing losses, you can then carry forward and then deduct those losses against any gain when you sell.

      However, if the yearly rental business lead to losses, and the sale of the property also represents a loss, then you may not be able to deduct your losses. There are tax rules that determine whether your real estate business status meets the "material participation" rules, which would allow a loss deduction against other non-real estate income, or whether your real estate business would be considered a "passive activity", in which case a high income physician would not be able to take a deduction.

      Maybe Johanna can comment more on the details of each of these statuses for the purposes of deducting any losses. I am not an accountant, just a doc who participates in real estate investment.

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      • #4
        You can only claim depreciation and other expenses when it's "available for rent". This means it could be empty but you're trying to find tenants and they could move in if you did. If you're not trying to rent the property it's not "in service" and therefore not depreciable and no other expenses currently deductible.

        I agree with Johanna that your other costs would be added to your property cost and ultimately reduce the gain or increase the loss on the sale. But don't deduct those other costs if you're not renting or trying to rent it.

        White.Beard.Doc - The only way you can "materially participate" in a rental is if you're a real estate professional (where you spend 750 hours doing real estate and it's more than half of your work during the year) and you meet one of the 7 material participation tests under §1.469-5T. If you're not a real estate professional then rental losses will always be passive regardless of your level of participation.

        Once the property sells in a fully taxable transaction any loss on the property itself and all accumulated losses are fully deductible against the other income you have.

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        • #5
          Originally posted by White.Beard.Doc View Post
          The house was a rental house, therefore it is a business you are running. As a business, all expenses are deductible against the profits, it any. And if there are ongoing losses, you can then carry forward and then deduct those losses against any gain when you sell.

          However, if the yearly rental business lead to losses, and the sale of the property also represents a loss, then you may not be able to deduct your losses. There are tax rules that determine whether your real estate business status meets the "material participation" rules, which would allow a loss deduction against other non-real estate income, or whether your real estate business would be considered a "passive activity", in which case a high income physician would not be able to take a deduction.

          Maybe Johanna can comment more on the details of each of these statuses for the purposes of deducting any losses. I am not an accountant, just a doc who participates in real estate investment.
          As David said, real estate professional status is close to impossible for a practicing doc. Out of >250 physicians/dentists, we have 1 who is about to attain RE professional status - and that is b/c this person just retired and is focusing on RE. This physician had ~100 prop’s even while practicing but still didn’t qualify. So I am going to assume in most every case that a doctor doesn’t qualify. (Side note: the client is contemplating selling most everything and investing in a solid equity portfolio. RE is a very “active” endeavor, notwithstanding the IRS’ definition of “passive”!)

          All expenditures on behalf of the property will always be deductible, but it’s a question of timing. If the endeavor is not profitable, costs w/b rolled fwd to either 1) the time the prop shows a profit or 2) the date of sale. The type of deduction at sale is represented by a decrease in gain realized or an increase in loss available. Unfortunately, the “capital loss” aspect is limited to a netting against any passive activity profits for the year + $3k.
          Financial planning, investment management and CPA services for physicians, dentists, and medical professionals | 270-247-6087

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          • #6
            Even though it is nearly impossible for an actively practicing doc to meet the standard for a real estate professional, some docs are married and have a spouse who can meet that test.

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            • #7
              Originally posted by White.Beard.Doc View Post
              Even though it is nearly impossible for an actively practicing doc to meet the standard for a real estate professional, some docs are married and have a spouse who can meet that test.
              Good point, you are exactly right. In that case, as long as all is done in the spouse's name, it would work. And if they own jointly, it would be one hot mess
              Financial planning, investment management and CPA services for physicians, dentists, and medical professionals | 270-247-6087

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              • #8
                Spouses are treated as a single taxpayer for the passive activity rules. The RE pro spouse technically wouldn't need to participate in or even own the rental activities directly for them to be considered non-passive as long as the non-RE pro spouse does participate. The RE pro spouse is participating essentially by proxy of the non-RE pro spouse. §469(h)(5)

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