I would be grateful for any assistance with rules relating to the following, as well as advice on how to enter into Turbo Tax Home & Business edition.
In 2018 we purchased a home to use as a rental property. Our purchase price was about $220,000, and we needed to spend another $80,000 to make it livable for a tenant. We rented for 3+ years, and our last tenant had the plumbing back up and continued to use toilets, creating extensive sewage damage on both floors and crawl space; which made the home inhabitable as well as in need of major remediation and repairs. The tenants moved out in March 2022, and we began demolition expecting to repair just the damage and put on the rental market again. But during demolition of impacted areas, we found termite damage, structural issues and other rot that had been hidden by prior owner's remodeling effort. This resulted in decision to perform a to the studs renovation (home was constructed in 1920, so it had poor wiring, no insulation, etc.) in which we spent another $310,000. This work seems to be treated as "restoration" by the tax code.
Once the restoration was nearly complete, we refinanced the original mortgage in order to pay off short term construction loans. With the increased interest rate, and much larger mortgage, we were unable to find suitable tenants willing to pay the monthly rent we would need to come close to break even on monthly cash flow; so we opted to sell the home rather than continue trying to rent. The home sold in October 2023 at a significant loss, for $475,000.
Major questions include:
1. Is it accurate that we can treat as a rental property up until the point it was sold, since we never converted for personal use?
2. I spent 925 hours working on the house in 2023 as we finalized renovations and got it ready for rent or sale. Does this qualify as "materially participating for more than 750 hours in this business"; even though it was ultimately not rented again? Since I was also employed, this does not quite represent 50% of my work related time; so it seems I cannot qualify as a Real Estate Professional.
3. Can we deduct expenses related to the mortgage refinance?
4. Where do I enter the costs / related details for the restoration expense? I entered as Repairs under Business / Common Expenses. Is this correct? I have read that major capital improvements should be depreciated over multiple years, but we sold the home, so I am unclear on how to calculate the cost basis. For example, should we include the purchase price + original capital improvements of $80,000 + the restoration expense of $310,000.
5. Where do I enter details of the sale of the house? Related to this, will TurboTax automatically account for depreciation of prior years (2018 - 2022)?
6. Based on the time spent working on the home in 2023, is the QBI safe harbor applicable?
Thank you!
