Tax handling of expenses before selling my rental property - HVAC and ongoing costs

I've been renting out my condo for about 6 years now, but I'm planning to sell it this summer. The problem is the HVAC system is on its last legs and I know it's going to be a major issue during inspection. If I replace the entire HVAC system now (about $8,500 quoted), my understanding is I would add this cost to my basis for the property rather than deducting it as a repair expense. But what about all the regular expenses I'm still paying while I prep it for sale? I'm still covering mortgage interest (about $1,450/month), HOA fees ($375/month), property taxes, etc. The tenant moved out last month so there's no rental income coming in while I'm fixing it up for sale. I was reading through IRS publication 527 about rental property expenses, but I'm confused about how to handle these ongoing costs when they're happening after the rental income has stopped but before the actual sale. Do these still count as rental expenses or are they somehow added to the basis? Or are they just personal expenses now that it's not actively being rented? Any help would be appreciated!

0 coins

18 comments

Cass Green

•8M

The HVAC replacement is definitely a capital improvement, so you're correct that it would be added to your basis rather than taken as a regular expense deduction. This will reduce your capital gain when you sell. For your ongoing expenses like mortgage interest, HOA fees, and property taxes during this "gap period" between active rental and sale, they're still considered rental expenses even without current rental income. The property is still held for the production of income since you're preparing it for sale, not converting it to personal use. You can deduct these expenses on Schedule E for the current tax year. Just make sure you document everything clearly - the date the tenant left, the period of preparation for sale, and when it actually sells. This timeline will be important for your tax filing.

0 coins

Cass Green

•8M

You can absolutely claim the expenses on this year's Schedule E regardless of when the property sells. The expenses belong to the tax year in which they were paid, not the year of sale. So all your 2025 expenses would go on your 2025 tax return, even if the property sells in 2026. Your Schedule E might show a loss this year since you have expenses but no rental income, but that's completely legitimate and can likely offset other income (subject to passive activity loss limitations depending on your overall situation and income level).

0 coins

Finley Garrett

•8M

I went through something similar last year with my duplex. I was totally confused about all these expenses during the "in-between time" when I was fixing it up to sell. I discovered this amazing tool called taxr.ai (https://taxr.ai) that saved me so much stress. I uploaded my situation details and previous Schedule E forms, and it gave me a complete breakdown of how to handle everything - from the new water heater I installed to the mortgage interest that kept accumulating. The best part was it showed me exactly which expenses could still go on Schedule E versus what needed to be added to my basis, and explained why. I'm not great with tax language, but their explanations made it really clear. Plus, when I had questions about my specific situation, they actually had tax pros available to clarify things!

0 coins

Finley Garrett

•8M

You don't need to upload all receipts initially - I just uploaded my previous Schedule E and described my situation. Later I did upload some receipts for the major improvements to get more specific guidance, but it wasn't required to get started. The system organizes everything by expense type which was super helpful. Their recommendations matched exactly what my accountant said, but I got them much faster and for way less money. My accountant actually complimented how organized everything was when I showed him the breakdown I got. He agreed with all the classifications of what was a repair versus capital improvement, and the guidance on the "gap period" expenses was spot on.

0 coins

Holly Lascelles

•8M

So I decided to try taxr.ai after my skeptical comment. Honestly, I was genuinely surprised. I had a very similar situation with my rental property in Florida that I'm selling, and I wasn't sure how to handle the expenses for the three months between tenants leaving and closing on the sale. The breakdown they provided made so much sense - they confirmed my new roof was definitely a basis addition (not a surprise) but then explained exactly how my ongoing insurance, interest, and property manager fees should be handled during the vacancy period. I've been doing my own taxes for years, but this particular situation had me confused. Their explanation about "held for production of income" versus "personal use" cleared everything up. If you're selling rental property, definitely worth checking out. Saved me from potentially making some reporting mistakes.

0 coins

Malia Ponder

•8M

I had a similar situation last year with my rental house. I spent weeks trying to call the IRS to get clarification about how to handle these "in-between" expenses. Could never get through to a real person! Then I found Claimyr (https://claimyr.com) and saw their demo video (https://youtu.be/_kiP6q8DX5c) showing how they get you connected to a real IRS agent quickly. I was honestly doubtful it would work, but I was desperate. They got me connected to an actual IRS representative in about 15 minutes when I had been trying for weeks on my own. The agent confirmed exactly what to do with my expenses during that gap period between rental and sale, and also explained how improvements right before sale should be handled. Having that official guidance directly from the IRS gave me complete confidence in my tax filing.

0 coins

Malia Ponder

•8M

It's not a back door - they use technology to navigate the IRS phone tree and wait on hold for you. When an actual agent comes on the line, you get a call connecting you directly to that agent. It works because they have systems that can stay on hold for hours so you don't have to. I was skeptical too, but it absolutely works. I spent nearly 45 minutes on hold with the IRS myself before giving up. With Claimyr, I went about my day, and they called me when they had an agent on the line. The agent answered my specific questions about how to handle improvements vs repairs when selling a rental, and confirmed that expenses during the preparation-for-sale period can still be deducted on Schedule E.

0 coins

Ryder Ross

•8M

Ok I need to eat my words. After posting that skeptical reply, I decided to try Claimyr anyway because I've been trying to reach the IRS about my rental property sale for THREE WEEKS with no luck. I got a call back in about 25 minutes with an actual IRS agent on the line! I nearly fell out of my chair. The agent confirmed that my kitchen renovation done right before selling needs to be added to basis, and that my ongoing expenses during the "for sale" period are still deductible on Schedule E for this tax year. Guys, if you need to actually talk to the IRS about your rental property or any tax question, this service is legit. Saved me hours of frustration and uncertainty.

0 coins

Gianni Serpent

•8M

Yes, you'll pay 25% on all the depreciation you've claimed (or were required to claim even if you didn't). It's separate from your capital gains tax and is reported on Form 4797. One way to potentially defer both capital gains and depreciation recapture tax is by doing a 1031 exchange into another investment property. But that only works if you want to stay in real estate investing, not if you're cashing out. There are strict timelines though - you need to identify potential replacement properties within 45 days of selling and complete the purchase within 180 days. You also need to use a qualified intermediary to hold the funds. Not simple, but it can save a ton in taxes if you're staying in the real estate game.

0 coins