Rental unit?

Taxpayer had a basement that had been rented out for about 10 years. In mid-2020, the former tenant moved out. Immediately after that, they intended to look for a new tenant. So they put an ad on Craigslist.

In 2021, the basement was vacant for the whole year. So I asked what the situation was there in 2021. Taxpayer was very upfront with me. He said they were very eager to look for a new tenant in late 2020 immediately after the former tenant moved out. But then as the pandemic dragged on, they were very worried about health risks as they had a small kid at home. Therefore, they did not actively look for a tenant in 2021 ("We had practically done nothing" in taxpayer's own words). They did keep the ad on Craigslist just because they did not remove it. Then I asked what they would have done if someone wanted to rent the basement. He said they would be extremely picky and thoroughly screened the applicant. My impression is they were very reluctant to rent the basement out in 2021 unless they found a 'perfect' tenant who posed minimal health risk (such as based on the occupation).

So here is your call: Was the basement a rental unit or not in 2021?

Yes.

Adjusting screening processes and being more selective during a global pandemic is reasonable. Plus, it seems they continued to publicly advertise the unit.

So here is your call: Was the basement a rental unit or not in 2021?

Yes, I agree with Man. There are rules for deductibility of vacant homes after you've placed it into service so I would think this would fall in alignment with those. Depreciation, mortgage interest, RE taxes, and any repairs and maintenance is would I would deduct.

ditto

Unless the space was converted back to personal use it would continue to be rental property. During the time it was vacant did the TP use the space for any personal purposes?

Unless the space was converted back to personal use it would continue to be rental property. During the time it was vacant did the TP use the space for any personal purposes?

Based on what the taxpayer said, the answer is 'no'. They just left it vacant and didn't do anything with it.

So here is your call: Was the basement a rental unit or not in 2021?

Yes, I agree with Man. There are rules for deductibility of vacant homes after you've placed it into service so I would think this would fall in alignment with those. Depreciation, mortgage interest, RE taxes, and any repairs and maintenance is would I would deduct.

Do you mean some of the expenses will have to de deducted differently if the space was vacant?

If you don't mind, can you point me to specific instructions as to what difference has to be made? Thank you in advance.

Do you mean some of the expenses will have to de deducted differently if the space was vacant?

No I'm saying that the rules state that if you've placed a property in service you're still able to treat it as a rental as long as it truly is even if its vacant so haven't a partial year of no renters and still claiming expenses is fine.

Hello everyone.

I asked this question one year ago. Now I want to reopen this thread as this issue continued in 2022.

As you can see, all the above posts were more than one year ago responding to my question about this particular rental situation. The consensus back then was it was still a rental unit and the expenses were deductible in 2021.

Now one year has passed and this same client contacted me for preparing his 2022 tax return. I still see no rental income listed in the 2022 tax information while he again lists out all the rental expenses. So I asked him what the situation of this rental unit was in 2022. He said he still had the ad on Craigslist but no one responded to the ad. The unit was still vacant for the whole year of 2022 with no personal use. Therefore, even until today, they are still holding it out for a tenant that they are comfortable with to get the unit rented.

What would you do in this situation? Would you still put the rental expenses in Schedule E and get them deducted just like last year? Or did anyone of you have a change of opinion this year since the unit has been vacant for this long?

Unfortunately, there's no bright line test on this. There are court cases in which units sat empty for over ten years and minimal effort was spend to rent it out, so even a ruling against rental treatment there isn't all that helpful when we're talking one or two or even five years.

I passed an audit in which a client with a basement unit went more than three years without rental income (on self-prepared returns - he found me to represent him in the audit), but auditor saw that repair work was being done, ads were placed, and that family complications explained some delays and he let the taxpayer keep the expense deduction. This makes me pretty willing to go a few years as long as all the other information looks reasonable.

I would add/verify just a couple of more circumstances to the details for comfort....

Is it still "ready" to be rented?

Is it used for personal use at ALL? (Do they store their personal items in the basement now? Man cave? Workout space? She shed? Music studio?)

If the client answered "yes" and "no" to these respectively, I guess I would lean towards reporting it as a rental property as well.

I would explain to the client that, while I think it is a reasonable position, there is a very slight chance of a a disallowance in an audit.

At some point the taxpayer has a duty to mitigate loss. And that requires additional effort that indicates this is a profit seeking venture.

They have "an ad" on Craigslist. How often is it bumped to the top? At least once a month?

Have they also advertised the rental on websites like realtor.com, zillow, trulia? If not why not?

Have they considered reducing the price?

Have they considered converting the property to a short-term rental and listing on airbnb / vrbo?

Are they storing personal items in the unit? Or letting guests stay in there?

The pandemic is over. I would grill them.