This most commonly happens in the tax year the property is converted from personal use to rental property, or vice-versa. It happens because the incorrect number of personal use days is entered. It's important to read the small print on the screen asking for business use and personal use days.
If you converted from personal use to rental use, then it's asking for the number of days of personal use *AFTER* you converted it to a rental. It is extremely rare for that number to be more than zero.
If you converted from rental use to personal use, then it's asking for the number of days of personal use *BEFORE* you converted it to personal use. Again, it is extremely rare for that number to be more than zero.
Additionally, if the personal use days is zero, then the business use percentage *must* be 100%. Basically, for the period of time it was classified as residential rental property, it was 100% business use. What it's use was while not classified as rental property is irrelevant.
In case it helps, I've included additional clarifications below.
-
Rental Property Dates & Numbers That Matter.
Date of Conversion
- If this was your primary residence before, then this date is
the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved
in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day
a renter "could" have moved in. That should be your "in
service" date if you were asked for that. Vacant periods between renters
count also PROVIDED you did not live in the house for one single day during
said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read
the screen. It's asking for the number of days you lived in the property AFTER
you converted it to a rental. I seriously doubt (though it is possible) that
you lived in the house (or space, if renting a part of your home) as your
primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no
doubt I didn't make a typo here. One Hundred Percent. After you
converted this property or space to rental use, it was one hundred percent
business use. What you used it for prior to the date of conversion doesn't
count.
-
RENTAL POPERTY ASSETS,
MAINTENANCE/CLEANING/REPAIRS DEFINED
Property Improvement.
Property improvements
are expenses you incur that add value to the property. Expenses for this are
entered in the Assets/Depreciation section and depreciated over time. Property
improvements can be done at any time after your initial purchase of the
property. It does not matter if it was your residence or a rental at the time
of the improvement. It still adds value to the property.
To be classified as a
property improvement, two criteria must be met:
1) The improvement
must become "a material part of" the property. For example,
remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet.
Replacing that old Central Air unit.
2) The improvement
must add "real" value to the property. In other words, when the property is appraised by a qualified,
certified, licensed property appraiser, he will appraise it at a higher value,
than he would have without the improvements.
Cleaning & Maintenance
Those expenses
incurred to maintain the rental property and it's assets in the useable
condition the property and/or asset was designed and intended for. Routine
cleaning and maintenance expenses are only deductible if they are incurred
while the property is classified as a rental. Cleaning and maintenance expenses
incurred in the process of preparing the property for rent are not deductible.
Repair
Those expenses
incurred to return the property or it's assets to the same useable condition
they were in, prior to the event that caused the property or asset to be
unusable. Repair expenses incurred are only deductible if incurred while the
property is classified as a rental. Repair costs incurred in the process of
preparing the property for rent are not deductible.
Additional clarifications: Painting a room does not qualify as a
property improvement. While the paint does become “a material part of” the
property, from the perspective of a property appraiser, it doesn’t add “real
value” to the property.
However, when you do
something like convert the garage into a 3rd bedroom for example,
making a 2 bedroom house into a 3
bedroom house adds “real value”. Of course, when you convert the garage to a
bedroom, you’re going to paint it. But you will include the cost of painting as
a part of the property improvement – not an expense separate from it.
Reporting the Sale of Rental Property
If you qualify for the "lived in 2 of
last 5 years" capital gains exclusion, then when prompted you WILL
indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL
personnel who don't qualify because of PCS orders, select this option anyway,
because you "MIGHT" qualify for at last a partial exclusion.
Start working through Rental & Royalty
Income (SCH E) "AS IF" you did not sell the property. One of the
screens near the start will ahve a selection on it for "I sold or
otherwise disposed of this property in 2017". Select it. After you
select the "I sold or otherwise disposed of this property in 2017"
you continue working it through "as if" you still own it. When you
come to the summary screen you will enter all of your rental income and
expenses, even it it's zero. Then you MUST work through the "Sale of
Assets/Depreciation" section. You must work through each individual asset
one at a time to report its disposition (in your case, all your rental assets
were sold).
Understand that if more than the property
itself is listed in your assets list, then you need to allocate your sales
price across all of your assets. You will only allocate the structure
sales price; you will NOT allocate the land sales price, since the land is not
a depreciable asset. Then if you sold this rental at a gain, you must
show a gain on all assets, even if that gain is $1. Likewise if you sold at a
loss then you must show a loss on all assets, even if that loss is $1
Basically when working through an asset you
select the option for "I stopped using this asset in 2017" and go
from there. Note that you MUST do this for EACH AND EVERY asset listed.
When you finish
working through everything listed in the assets section, if you ever at any
time you owned this rental you claimed vehicle expenses, then you must also
work through the vehicle section and show the disposition of the vehicle. Most
likely, your vehicle disposition will be "removed for personal use",
as I seriously doubt you sold your vehicle as a part of this rental sale.
