Paint

[JG EA]

I am adding the EA not because of a self pat on the back, but because I was too stupid to realize when entering a name that had to be 3 letters long that the 3 letters could have included a space in between J and G. I have been posting under J G other places.

Did anyone notice my theta comment? I thought this board was very high brow until noticing the word Tax is in red.

Paint:

Client will be painting a rental property this year in preparation to sell. About 3/4 of the job could be easier attributable to cleaning up after the last renters. About 1/4 is to attract a buyer. The rental is up for sale and no one has rented it at all in this year.

It wasn't painted in connection with a renovation, so not a basis item. Where would you put the paint? Schedule E? I know the pub 527 says expenses connected to a rental can be deducted. So, where would that be. I guess it bothers me that it hasn't been rented this year.

[Snaggletooth]

Fixing-up Expenses

JG, good to have you "over here."

I would feel comfortable deducting in the manner you described, however, I believe an auditors' approach would concentrate not upon a percentage of what might be supported, but instead WHEN was the painting done with respect to the sale, and then he would apply it either to the rent or to the sale on an "all-or-nothing" basis.

There was, back in the days of the old 2119 (Sale of Personal Residence), a deduction for "Fixing up" expenses, and I believe painting, repairing, etc. done within a certain time frame (like 45 days) was considered to be attributable to the sale. Others may correct me as to exactness, but I believe the thought pattern here is correct.

If they still follow this logic, Painting done within 45 days of the sale would be an addition to basis, thus deductible against the sale. Painting done outside of 45 days would be attributable to "Rent" on Schedule E.

This, however, is only a general argument. In your case, I believe the auditor would throw out any allocation to rent because the owner is not reporting any rental revenue. In all honesty, if I were him I would do the same thing. In your case, the old "circumstances and conditions" argument would trump any deductibility on Schedule E. You are quite right to be concerned about lack of reported revenue.

Regards, Ron J.

[Mark Goldberg]

Not a fixing up expense

In the old days a fixing up expense was not an addition to basis (it was some kind of adjustment which reduced the amount you had to cover with the new house purchase) and it only had to do with a primary residence. So I disagree with the previous post. . Painting is not an addition to basis. It is not a sales expense. It is a current year expense. So either show it as a rental expense against zero income or forgetaboutit. If this property has been a rental property for a long time I think you argue that even though it was not rented in the year of sale, it maintained it's character as a rental property.

[Bird Legs]

Rental exp. or sales expense

Was the house on the rental market when the house was painted? If so then rental expense. There does not have to be rental income, the property must be advertised for rent. As long as you can provide evidence to show that you were trying to rent it then it is rental property.
If it was taken off the rental market and placed on the sales market and the painting occurred during this time then this would be a selling expense.
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[jainen]

Rental

I'm always uncomfortable when someone claims rental losses with no tenant. At least in my area, houses don't stay vacant if owner makes a bona fide effort to determine market value and other reasonable terms. A few months before selling doesn't bother me though, because who wants a bunch of painters and realtors in the way? Since this fixup related primarily to normal wear and tear of the rental take the expenses on Schedule E. If it were an unusual activity along the lines of dressing the house for show I would call it sales expense, or if it were required on the sales contract.

[JG EA]

Thanks to all.

If they still follow this logic, Painting done within 45 days of the sale would be an addition to basis, thus deductible against the sale. Painting done outside of 45 days would be attributable to "Rent" on Schedule E..

If it was taken off the rental market and placed on the sales market and the painting occurred during this time then this would be a selling expense.
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Question, then you Bird like Snag (within a time period) said would add this to basis like the other selling expenses? If so, then this answers my question. Thank you!

[Bees Knees]

Fixing up expenses should be a current deduction

IRS Pub 551 on page 5 under deducting vs. capitalizing costs, it says you cannot add to basis amounts paid for incidental repairs or maintenance that are deductible as business expenses. The question of fixing up expenses should center around whether or not the nature of the repairs is an improvement, or a repair. Rental property that is vacant because it was trashed by the previous tenant is still a rental activity. Until it is converted to personal use property, or intentionally held for some other purpose other than making money, operating costs, including the cost of repairs are deductible.

I had an audit where the taxpayer took 9 months to repair his rental after the previous renters trashed the place. The auditor tried to say the repairs should be added to basis. I came up with all kinds of court cases where property had been taken out of service for years, but not retired, and the court said depreciation and other costs were still current expenses. One case from the 1940s had a taxi cab company take a few taxi cabs out of service, put up on blocks with the tires and batteries removed for 3 or 4 years at a time, and the court said you still depreciated the property because they could be used again in the business. Only when you permanently retire property from service with no intent to use it again do you stop taking a depreciation deduction.

I would strongly argue that fixing up expenses with the intent of selling rental property is a current expense, not to be added to basis. The reason is, if the rental does not sell, it goes back to being rental, and the fixing up repair costs could not be added to basis because they did not improve the overall function or life of the property. They simply repaired something that already worked just fine prior to the damage caused by the previous renters.

[JG EA]

Thanks very much!

I appreciate your expertise. This will help me in many situations. An area that never has jelled for me.

[Armando Beaujolais]

The painting is a current rental expense.

Stop being so timid about taking rental expenses with no income, folks. Just print out this reg and carry it with you. You'll sleep better:

Reg. 1.212-1 is "Nontrade or business expenses."

Reg. 1.212-1(b) states, in part:

"...ordinary and necessary expenses paid or incurred in the management, conservation, or maintenance of a building devoted to rental purposes are deductible notwithstanding that there is actually no income therefrom in the taxable year, and regardless of the manner in which or the purposes for which the property in question was acquired..."

As Bees said, be careful about adding a repair cost to basis. If it's not supposed to be there, you're at risk for losing the deduction altogether.

The cost of painting the property is regular maintenance, not a capital expense. The painting restores the property to regular operating condition, and does not increase the value, prolong the useful life, etc., etc., so the cost is not a capital expense. If the painting was part of a big restoration project, that would be a different story. But it's not (not increasing useful life).

Deduct the cost of painting, other maintenance expenses, on Schedule E. Don't forget to deduct depreciation. Depreciation begins and ends when the property is "ready and available" for service, regardless of when its intended use actually begins. You have to deduct depreciation from basis whether you deduct it from income or not.

True, zero income compared with significant expenses can be an audit trigger. But that's not a good reason to change reporting or to ignore deductible expenses.