Converted Rental Property

[tpert]

Client had the following problem in 2007:

His tenant of several years complained in 2007 that there were too many problems which had not been corrected over the years and stopped paying rent. Taxpayer agreed to fix the problems and tenant agreed to pay the back rent when the problems were corrected. Taxpayer paid several thousand in repairs and more in improvements to kitchen and bathroom which were capital improvements.

As repairs were being completed in the middle of the year, tenant moved out, leaving no forwarding address and never paying the back rent. Lawyer advised him that a search for him would cost nearly as much as the back rent not received. Taxpayer decided not to look for any more tenants and offered home to Son. Home was too small for son's plans, so taxpayer had old house demolished and is deeding land to son to build new home.

I am telling taxpayer that repairs can be deducted and a pro-rata portion of the capital improvements up until the time the decision was made to stop renting (next to nothing), but this does not feel right.

Is there anything else that he might claim on this rental property gone bad? He had no rent for this property for the entire year due to the tenant shenanigans. Thanks for your thoughts on this.

[solomon]

Have you considered IRC 280B?

[tpert]

Solomon,

Not 100% sure of your reference to IRC 280B....

If you are talking about adding the cost of the demolition to the basis of the property transferred to the son, We have not gotten that far yet. The taxpayer had inherited this property from his father a few years ago with the associated high property value of the time (including the structure). When the property is deeded to his son, I assume that the gift will be the value of the land plus demolition costs.

Are you suggesting that he take a loss on the conversion of this property to personal use?

Thanks for your input.

[Roland Slugg]

To the extent the "repairs" are legitimate rental expenses they may be deducted on Schedule E. The "improvements" must be capitalized. I would suggest that the taxpayer keep good notes and a "timeline" to show that at the time the repairs were made, the owner believed his tenant would make good on his promise to resume paying rent, and even pay withheld back rent. This should not be too difficult to do, as no sane person would make repairs to property he know he was going to demolish soon after.

When a building is demolished, its basis (plus the cost to raze) must be added to the basis of the land, and no loss is allowed. (Code §280B(1) and (2)) This includes the cost of those improvements you mentioned.

[Davc]

This should not be too difficult to do, as no sane person would make repairs to property he know he was going to demolish soon after.

A doctor might, if he thought he or she could deduct it.