No Income Rental

[HJSTAXSTOP]

I have a client whose one rental house was put in service in late 2004. The tenant vandlized it and had to be evicted. For the most of 2005, until December, the taxpayer made repairs to make the property again rentable. There is no rental income for 2005.
Would this be treated in the same manner as if it did have income or does it have to be rentable as when it's first put in service? Thanks for your time. HJ

[OldJack]

This sounds like a temporary repair condition or "idle property' and the status of the property does not change, therefore it is still classified as residential rental property for 2005 with depreciation & expenses and just no income on 1040 Sch-E. However, losses on rental property are passive activities and may be limited and or suspended.

Idle Property
Continue to claim a deduction for depreciation on property
used in your business or for the production of income even
if it is temporarily idle. For example, if you stop using a
machine because there is a temporary lack of a market for
a product made with that machine, continue to deduct
depreciation on the machine.

[Snaggletooth]

Sensible Limits

I have done as Ol' Jack suggested: rental loss with zero revenue, farm loss with zero revenue, etc. At some point, however, I have to make a decision whether the taxpayer is serious about conducting business.

Client bought 35 acres adjacent to his house. Also bought a tractor, bush-hog, fencing material, etc. Wanted to deduct depreciation, land taxes, operating costs, etc. on a schedule F. Can he do this with zero sales? SURE HE CAN!! and so we did. However, in the second year, he never bought cattle, never plowed the earth, never did anything except mow his 35 acre yard. In year 2, I put a screaming halt to a second consecutive year of deductions with no revenue.

[OldJack]

A farmer is "presumed" to be farming for profit with losses allowed if he shows a profit 3 years out of 5 years. Therefore farm losses for at least 2 years should be allowed without question as to is it a farming loss or a hobby loss. Of course if the taxpayer does not appear to be farming he should not try to claim farming losses.

Presumption of profit. Your farming or other
activity is presumed carried on for profit if it
produced a profit in at least 3 of the last 5 tax
years, including the current year. Activities that consist
primarily of breeding, training, showing,
or racing horses are presumed carried on for profit
if they produced a profit in at least 2 of the last
7 tax years, including the current year. The
activity must be substantially the same for each year
within this period. You have a profit when the
gross income from an activity is more than the
deductions for it. If a taxpayer dies before the end of the
5-year (or 7-year) period, the period ends on the
date of the taxpayer’s death.
If your business or investment activity
passes this 3- (or 2-) years-of-profit test,
presume it is carried on for profit. This means the
limits discussed here do not apply. You can take
all your business deductions from the activity on
Schedule F, even for the years that you have a
loss. You can rely on this presumption in every
case, unless the IRS shows it is not valid.
If you fail the 3 or 2 years-of-profit test,
you may still be considered operating your farm
for profit by considering the factors listed earlier.