Investors & landlords

In fact, we won't report EITHER of those on our tax returns for either 2022 or 2023 because the unit never went back "in service", correct?

Correct.

But I DO want to keep good records of those assets because I might need them to add to the cost basis in the future if one of those 3 events occurs, correct?

Correct.

I didn't realize that improvements could add to one's cost basis on property that was NOT investment property.

It does. Keep this in mind too. When you do a property improvement, depending on what that improvement is, the property tax appraiser can also appraise a higher tax value, meaning you pay more in property tax too. For example, if you add on to a structure to give it another bedroom, or a garage, that not only adds to your cost basis, but it's a fair bet the property appraiser is going to increase the tax value also. Now you no why you are required to get a permit when you do such work as adding on to a structure to increase it's floor space. .... and you though the primary reason was so the "inspector" could make sure the work was done to code. 🙂

And since you're telling me to just go ahead and "convert" the condo to personal use as of December 2022, I'm just seeking clarity that if it becomes our primary residence at that time, we can still use both the HOA improvements and bathroom remodel to add to our cost basis in the future??

Absolutely.

If I have all this right, based on similar posts it looks like I'd still go thru my Schedule E entries just as I normally would to capture the Jan - Nov rental income and expenses.

Yes. You can make your conversion date anywhere from 1 day after the last renter moved out, to the date the inside work started. Typically, you make it one day after the last renter moved out, because you did not advertise it as available for rent after that date.

I just won't address AT ALL the 2 big improvement projects. But then I also need to follow the leads for converting the property, effective December. All correct?

All correct. Some additional notes just for convenience.

As you work through the SCH E section in the Property Profile section, you'll have a checkbox for "I converted this property from rental to personal use in 2022". Select that box. Then you'll report your rental income and expenses incurred up to the date of conversion. Important to note that expenses incurred after the date of conversion are not deductible as a SCH E rental expense.

After entering all rental income/expenses you'll have to work through the Assets/Depreciation section and edit/update each individual asset one at a time. For each asset:

- You'll be presented a screen for "I stopped using this asset in 2022". Click YES. Then when asked for the disposition/sale date enter the date that is at least 1 day after the last renter moved out.

- On the "Special Handling Required?" Screen, read that screen to understand why I am telling you to click YES. Then click YES.

Repeat the above two items for each individual asset listed.

If you claimed any vehicle use for that rental at any time while you owned it, and even if less than 100% business use, you must work through the vehicle expenses section to show the disposition of the vehicle. That too will be shown as removed for personal use.

When you are totally done with your tax return, have filed it with the IRS *and* it as been accepted by the IRS, you will need to do two things. You need to do this, because there is no way you're going to remember the details when "on of three things happens" in your life, which I mentioned in an earlier post.

1) Save the entire tax return to your computer in both .tax2022 format and PDF format.

2) Print out the tax return.

When you save the tax return in PDF format, you want to save absolutely everything; calculation worksheets, forms, and all supporting documents. That way, if necessary in the future you can "follow the numbers" to refresh your memory on what you did in the past, so you report things correctly in the future.  With only one rental, you can expect the document to be over 100 pages quite easily.

When you print the return, I suggest you print the PDF copy so you have everything in hard copy. Technology is not perfect. Chances are, at some time in the future you'll get a new computer, or the current computer will crash beyond recovery.

There are three documents from the printout you will need in the future. So if anything, at least print those three documents and store them in a safe place (such as with your closing documents you got at the closing when you originally purchased the property) so you can find them easily in the future.

In the PDF there are two "unofficial" form 4562's for that specific rental property. The two I'm talking about both print in landscape format. One is titled "Depreciation and Amortization Report" and the other is titled "Alternative Minimum Tax Depreciation". To confirm you have the correct ones, the name you used to identify the property will be in the upper left corner of both. These show all of your original information such as cost basis, date placed in service, total depreciation taken, etc. etc. etc. 

The third document you will need will only exist if you have an Passive Activity Loss (PAL) carry overs. it's IRS Form 8582 - Passive Activity Loss Limitations. If you don't have that form, that just means you don't have any PAL suspended losses to carry over from 2022, as all of your losses were allowed. Just make a note on one of the 4562's that you don't have any PAL suspended losses, so you won't panic when looking for it in the future.

Additional notes of importance:

- When you convert the property to personal use in Dec 2022, since MACRS uses the mid-month convention for rental property, depreciation will stop on Dec 15th.

 - The program will prorate the deductible mortgage interest between the SCH E for the period of time it was a rental, and SCH A for the period of time it was personal use in 2022. Your SCH A amount will be very little. Understand that until the total of all your SCH A itemized deductions exceed your standard deduction, this will make no difference on your tax liability. So if the program does not generate a SCH A, that means you're taking the standard deduction.

 - The program will pro-rate property taxes between SCH E and SCH A also. But again, I doubt the total of your SCH A deductions will exceed your standard deduction, meaning there will be no SCH A at all and the program will inform you that the standard deduction is better for you.

 - For property insurance, you will have to pro-rate that manually yourself. Assuming a conversion date of 1 Dec 2022 you'll claim 11/12 of the property insurance you paid in 2022 on the SCH E. The remaining 1/12 of the property insurance is not deductible anywhere, since insurance for personal use property is not deductible.

Whew! That's a lot of info. Hope I didn't forget anything.

*those who claim to understand the situation and all aspects of it, are obviously not paying attention*