Mortgage interest on vacant rental property listed for sale

[accoun5]

Taxpayer stopped renting his rental property 7/31/17. Rental property was vacant 8/1/17-10/10/17 and sold 10/10/17. Can taxpayer deduct the mortgage interest on vacant rental property from 8/1/17-10/10/17 on Schedule E?

Taxpayer already has two other homes which use up all of the interest deduction on Schedule A,.

So, the interest on the former rental property vacant pending sale 7/1/17-10/10/17 can't go on Schedule A as you can't deduct interest on a 3rd home.

Is this investment interest for the period vacant and pending sale?

[itonewbie · Accepted solution]

We were not clear in your question but I assume the property was taken off the market as of 8/1/2017 and was not available for rental during the intervening period.

Since the rental property constitutes a passive activity under §469 and should, prima facie, not meet the de minimis exception under the regulations given the amount of gross income that would have received during the year, it cannot generally be treated as an investment property for purposes of §163.

In the past, otherwise deductible expenses incurred in relation to the retired rental property pending a sale may be deducted under §212 but 2% miscellaneous itemized deductions under §67 have since been suspended under TCJA.

[accoun5]

Thanks so much. The buyer paid the seller early occupancy on escrow from 10/1/17-10/10/17 sale. Since it was rented for early occupancy to the buyer, can 100% of the mortgage interest be deductible on Schedule E?

[itonewbie]

What exactly do you mean "the buyer paid the seller early occupancy on escrow"?  I understand the buyer moved in prior to closing but what was paid and how was that structured?

[accoun5]

Thanks- the buyer moved in 10 days before he bought the property and he paid the seller rent for 10 days. . On the Hud-1, it shows the buyer paid rent for 10 days so he could move in early.

[itonewbie]

If the rent was not commensurate with market rate, income may be reportable on Line 21 but deductions for expenses limited.

[accoun5]

Thanks so much. The rent was $96 per day and so it was commensurate with California market rate rent.

[TaxGuyBill]

While itonewbie is probably correct, this is one scenario that I go ahead and deduct it as rental interest anyways.  Although the law may technically disagree with me, from my perspective a short period of non-rental immediately before the sale doesn't suddenly convert it to "investment" property.  The sale is even still reported on Form 4797 as a 'business' property.  Again, I realize I'm probably technically wrong, but CAGMC.  :smile:

[accoun5]

Thanks so much.  The tenant vacated  7/31/17 and the property was cleaned and repaired in August 2017 and September 2017 and the buyer was in a hurry to move in and so the buyer paid for 10 days in October 2017 prior to closing the deal and buying the property 10/10/17.

[accoun5]

Buyer paid rent to seller for 10 days prior to buying the house 10/10/17.

[itonewbie]

@TaxGuyBill Understand that's probably how many would treat that from a practical perspective.  For me, my biggest problem is that the property was taken off the market (for over 2 months).

I also agree that as an "investment" property for that brief period as the Regs under §469 and §163 will disqualify that treatment.  It remains a passive activity and the gain upon fully taxable disposition may then offset any current as well as suspended PAL.

[itonewbie]

But I could be convinced under the right circumstances that the property remains a rental property during the brief period it is vacant, especially if it was listed for sale during the occupancy but a buyer could only be found or the sale could only be closed after the tenant move out.

[accoun5]

Thanks

[itonewbie]

NP, @accoun5!