Hi Paula,
I think I can answer this question for you, but must add the disclaimer that I may not have all the facts available to give you a complete answer, and this is no substitute for a professional tax consultation.
The IRS generally requires that in order to deduct repair expenses on a property that the property must be "placed in service" prior to the repair deduction. "Placed in service" generally means that it is rent ready or available for sale or rent.
Otherwise, the "repair" costs must be capitalized, which means adding the repair costs to the cost of the property. If this is the case, these costs can later be recovered either through depreciation when the property is placed in service, or treated as part of the cost of the property when the property is sold.
In your case, it sounds like the property may not have been placed in service prior to the repairs, but since the property was sold, it looks like the repair cost could be recovered through the sale price. Therefore, if my facts are correct, I don't see it as a "red flag" to claim it, especially since it was recovered in the sale price.
Remember the disclaimer I gave from the beginning. If you wish, I would be happy to discuss this with you in more detail.
Donald McCartney, CPA
"The Real Estate Friendly CPA"
