Deductible rental expenses while vacant and available for rent (subsequently listed for sale).

[Richard1024]

Client had a rental property for the past ten years.  Last tenant moved out in October 2020 and landlord was hoping to get another renter.  In that vacant time period from October through December, they did some maintenance updates such painting, installed new appliances and even installed a new ‘mini split, ductless’ AC system.  Based on positive economic factors where properties were selling for above asking price, they listed the property for sale before year end with sale closing in 2021.  Are there any exception to a ductless AC system being expensed rather than being depreciated as required or added to costs due to sale of property?

[me112233]

The safe harbor allows expensing for things that once required depreciating.  You can still depreciate a capital expenditure if you want to.

Regardless, in the scenario you provided, It's not that big a deal either way.  If you take it as an expense, the mini-split doesn't increase the basis, so more of the past depreciation will be recaptured at a more-or-less ordinary tax rate, BUT, your ordinary income from rental will be lower.    if you don't expense it, and just add it to the basis when calculating the cap gain in 2021, then rental (ordinary) income for 2020 will be higher than it would be if you expense the mini-split, BUT you will have a lower recapture of depreciation in 2021. 

Six or a half-dozen.  You choose.

[Richard1024]

Thank you for your response regarding the deminimus threshold.  Greatly appreciated.  Currently, there is about $15k in expenses for the period of rental through sale listing at 12/20, of which $4.5k relates to the AC unit.  I don't believe they itemized invoices to consider the deminimus threshold of $2500 per item.  Since the property is now sold as of February 2021, no more depreciation applicable to the future years.  As expenses (repairs, maintenance & improvements) are greater than $10k, appears the safe harbor may also limited? 

[me112233 · Accepted solution]

I think you missed my point.  The real difference is tax will be negligible, though only one year (2020 or 2021) will get the benefit of the expenditure.  

With the additional info, the safe harbor might not be an option.  Now, knowing that the property has sold, no real harm in just setting the stuff up for depreciation in 2020, then processing the sale in 2021 as per normal capital gain.  It will all come out in the wash.

[Richard1024]

Great - totally make sense now.  Thank you for your response.