Rental Property fix up expenses prior to sale

[TaxTackler]

My client sold his rental home early January 2020. 

Can I take the expenses for fixing up prior to sale on the 

2019 Schedule E? 

TIA

[IRonMaN · Accepted solution]

No - they get added to the basis of the property.

[qbteachmt]

These are not expenses; they are invested in the property. They are right there, in the new paint, windows, flooring, yard, etc. That's why they don't get entered as Expense. They are part of figuring if the project made Profit, because they are part of costs, but not expense. Think of it as Further Investment in the project, not as expense.

[BobKamman]

I don’t like this question. I wish you hadn’t asked. It triggers memory of the old law about selling a primary home and reinvesting the proceeds to avoid paying tax on the gain. Do you still have clients who ask about that? I do. I tell them that law was changed back in the days of President Clinton. Some of them don’t remember Clinton but they remember selling a home and buying a more expensive one. Anyway, “fixing-up expenses” was a term of art. Specifically,

§ 1.1034–1 (6) Fixing-up expenses means the aggregate of the expenses for work performed...on the old residence in order to assist in its sale, provided that such expenses (i) are incurred for work performed during the 90-day period ending on the day on which the contract to sell the old residence is entered into; and (ii) are paid on or before the 30th day after the date of the sale of the old residence; and (iii) are neither (a) allowable as deductions in computing taxable income under section 63(a), nor (b) taken into account in computing the amount realized from the sale of the old residence . . . Fixing-up expenses does not include expenditures which are properly chargeable to capital account and which would, therefore, constitute adjustments to the basis of the old residence...

As I recall, fixing-up expenses never really helped, except in rare cases when part of the gain was going to be taxable. But if what you mean by “fixing-up expenses” are things that can’t be added to basis, then why not deduct them on Schedule E for 2019? It’s cleaning up the mess the last tenants made, after all.

[qbteachmt]

This is exactly how I teach this lesson in my QB classes through a continuing learning center to business people in my community:

There is a difference between Expense and Expenditure. Cash Out is an Expenditure, but knowing if that is an Expense or Not is based on what you spent the money for. In this classroom, if I had to replace one window, that is a repair as expense. But, if I replace all the windows with new, high-efficiency windows, that is Improvement to my asset and not an Expense, even though it is something to pay for. Expense is like electricity, paper and pens = POOF! All gone. Asset expenditure is still right there, invested in those new windows or, for inventory, that closet full of teddy bears you bought in anticipation of a sales rush on Valentine's Day.

Later, even years later, when I run into one of my students, they tell me that the teddy bear imagery stuck with them, which is why I use it.

[Kacee1001]

Hi bob. Wish you were doing my taxes.

[davidoshea]

Lovely answer

Thank you