A story problem for tax experts

[Riggerjack]

It's that time again, and I have a question Google us not very helpful with.


I have 3 houses. My original house in Marysville has been rented since 2010. My home on Whidbey, and another rental in Everett. Whidbey and Everett are simple, deal with them as in the past. But marysville...

In December, 2016, my tenant moved out. Leaving a disaster behind. (Pictures in the paper, city pressing public health case, all of it. Lots of cleanup and rehab.) We decided about halfway through the cleanup that we would prefer to just sell the house, rather than rent it again. We are still working on the house.

Last summer, tired of the commuting from the island, we started camping at the house. Working on it after work and weekends. Some of the work is capital, (tear off old and build new deck) but most would be expense, if it were a rental.

But the whole year went by, and we didn't get it up for sale, or back into service as a rental.

So, how do I treat the costs of this house in 2017? Is it a rental, with no income, standard schedule E? Or is it a second home, and I lose the depreciation, and when I sell it I recoup my 2017 expenses against the capital gains and depreciation recapture?

Or worse, is there some complication I haven't thought of yet?

Thanks in advance, I know this is the busy time for tax folks.

[slowtraveler]

I think the Bigger Pockets real estate forum may have more wisdom on this topic.

[Riggerjack]

Yeah. I think I may just have to reread the instructions. Taxed today, taxed next year, I don't care. I just don't need complications. Or an audit!

[Riggerjack]

And the answer is:

If you did use the unit as a home and
rented the unit out for fewer than 15
days in 2017, do not report the rental in-
come and do not deduct any rental ex-
penses. If you itemize deductions on
Schedule A, you can deduct allowable
interest, taxes, and casualty losses.

From schedule E, line 2 for anyone wondering.

[ba199]

Repairs can at least be added to basis.

[ba199]

I'm an accountant - A young one though. It's tough to give advice without seeing the whole picture but Riggerjack I think you're handling it right here. You maybe won't be able to take advantage of using all the expenses related to the rental this year by converting the rental to personal use for the year but you're setting yourself up for the capital gains exclusion for a primary residence (live in it for two of previous five years) by converting it.

The other option is what Augustus just posted if you're absolutely not going to sell. Consider it "available for rent" for part of the year and carry all the expenses for the time you weren't living there into the future as a suspended loss.

[Riggerjack]

Sorry to cause the confusion, it is a bit confused.

We started, thinking of cleanup and renting again. Checking rent, cleaning up, and seeing all the damage. As we got a better handle on the amount of work, and the condition of the real estate market, we decided to sell.

In summer, we stopped driving here each day, got a cheap air mattress, and set ourselves up to camp here on weekends. But working all week, then working on the house all weekend was causing issues. Mainly with my wife and her cats. So, to keep the peace, we moved the cats in, or more to the point, I relented, and she moved her cats in...

So, as the situation stands, all our stuff is on Whidbey. But our cats and clothes, and personal hygiene stuff is in Marysville. We spend most nights in Marysville, on an inflatable mattress.

I wish I had done this with a strategic intent, to establish residency, at least there would be a plan. Instead, I am trying to just pay my taxes. I'm not even trying to minimize the tax burden, I'm trying to figure out how to report it like the IRS wants. As I read specific passages that almost, but not exactly, cover my situation in form after form, after form, I am starting to understand how a pilot might decide to land in a local IRS office, whatever the floor number.

I didn't think we would be here this long, but burning the candle at both ends caused some burnout. To get to 2 years would mean waiting until December, then selling, as we don't have some unforeseen circumstances to cause us to leave. So the 2 years rule may apply if we are seriously slow, but I really want this house sold this year. We intend to sell the Everett house to our renters next January.

But the more I think about it, the more I'm liking waiting until December, then selling... 8 more months, and we would get capital gains exclusion...