July 11th, 2011 | 
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Question: Advice from someone who seriously knows Real Estate Tax Please.. Need to make home ‘investmt property’?
Bought a “fixer upper” house (SC, USA) in 2008 and live in it now. I know I have to wait 2 yrs to sell if I don’t want to pay taxes at all. I’d like to sell it now though.
If it is my ‘personal” residence and I sell now, then I cannot deduct repairs etc..maybe only “improvements” but not paint or repairs for sure.
Now I live in a vacation spot, so if I go on my own vacation and rent this out for a week or two in Nov. & Dec. Does that then turn my ‘residence’ into an ‘investment’ property so I can then deduct those things so I can pay less tax on my profit?
We knew we would flip it but really thought we’d stay 2 years so we got a normal homeowner loan, not an investment loan. We have to prove to the IRS that we meant it as an investment to deduct these things. We did mean it, but since we did not get an investment loan I think the only way to go is to actually rent it out. But I only want to do that if it would definitely work.. Or would that just make it a 2nd home?
Would this work? Thanks for your expertise!
K
Ok, so it sounds like Judy is right.. I have sold 2 other investment properties (that do pass the test) in 2009… so we do have a history of being investors. Those investments went poorly (house in MI) Is there any other way to prove we intended to make this an investment? I’d like to balance out the books with a profit here.
Also can I possibly offset my loss their with a profit here next year? Or do I have to keep deducting 3k/year on my schdedule K (I think that’s the right letter)
Answer:
Answer by Judy
You can’t turn it into “investment property” with a week or two of renting it out – and you’d have to have not used it yourself those years except for a minimal time. And anyway, you could only deduct the repairs AFTER it’s rental property.
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There’s a special rule if you rent out your home (principal residence or a second home) for 14 days or less. The IRS doesn’t want to know about it. You don’t report the income nor do you deduct any expenses. And before you ask, renting it out for 15 days won’t get you around that. Your deduction for rental expenses would be the prorated share or 15/365ths or about 4%
Since you are living in this place, major repairs are added to your basis. Minor repairs have no tax consequences. When you put it on the market, you can deduct minor “fixing up” expenses (carpet cleaning, touch-up painting, etc.) but that’s about it.
The type of loan is irrelevant. And while you MIGHT have intended that this be an investment, moving in and making it your principal residence ended all of that. If you sell in less than 2 years then you pay capital gains tax on any gain. You MIGHT qualify for a pro-rata exclusion on the capital gains if you are forced to move for a job change or other “unforeseen circumstances” but the IRS does take a closer look at these claims.