Investors & landlords

There are several ways this can be done. No matter which way you do it, there's going to be some manual math on your part. So I'm going to cover the method that will be easiest with TurboTax. This is going to involve converting the entire property to personal use, effective one day after the renter moved out of the 3-bedroom unit. Then you figure the adjusted cost basis of the 1-bedroom unit and place it in service as a completely new rental property, converting only that one unit back to a rental one day after everything was converted to personal use. For the purpose of detail here, I'm going to assume the renter moved out of the 3-bedroom unit on Jun 31, 2020 since you didn't provide a date. You'll have to adjust the math accordingly.

Step 1 - Convert the entire property to personal use with an effective date of 7/1/2020. As you start working through the rental section, make sure you select the option for "I converted this property from a rental to personal use in 2020".

DO NOT select the option to let the program do the splits for you. You will do all splits manually. If you let the program do the splits for you, then it will split between SCH E for the period of time it was a rental, and SCH A for the period of time it was personal use. Since we're only converting one unit back to a rental, the program just flat out will not be able to figure the math and do the splits correctly for you. Therefore, you must do the splits for Mortgage Interest and property taxes manually, and you will have to pro-rate the property insurance manually.

Next, work through rental income entering only the rental income received up to the date of conversion. (7/1/2020 in my scenario).

Next, work through the rental expenses section and only enter those expenses incurred up to 7/1/2020.This will require you to manually determine the amount of property taxes and mortgage interest to claim in the rental expenses section, as well as the pro-rated portion of the property insurance that you claim. For those three if you figure 1/12 for each month the entire property was classified as a rental in 2020, that should be simple. For example, if you paid $1,200 for insurance and the property was converted to personal use on 7/1/2020, then you get to claim 6/12 of that insurance as a rental expense.

For the math, thats 8.25% per month. So .0825 times 1200 equals 100 per month. For six months (in my scenaro) thats $600 you can claim on the SCH E for property insurance.

Next, work through the assets/deprecation section and you must do the below for each individual asset listed. (Please let me know if you have more than one asset listed)

- As you work through each asset, write down the amount in the "prior depr" box.I am also assuming that the "Asset Type" for all assets listed is "I - Residental Rental Real Estate". If one is different, then I need to know what the asset type is. (May or may not matter when setting up the "new" rental property.)

- Select YES on the screen for "I stopped using this asset in 2020".

- Yes, the property was rented all year. (The program "knows" to stop depreciation on your converstion date, entered later.)

- On the screen that ask for the disposition/sale date, enter a date one day after the last renter moved out of the 3-bedroom (7/1/2020 in my scenario)

- On the "Special Handling Required?" screen you *must* select YES. If you select NO you will be "forced" to enter sales data. You did not sell the property. So select YES.

- On the last screen for this specific asset write down the depreciation for the current (2020) tax year.

- Add that depreciation to the prior depr amount, and that total is the amount of depreciation taken on this specific asset from the date it was placed in service, up to the date you converted it to personal use. You will need this number later.

- Continue working through the asset to the end.

Note you must do all three items above for each and every asset listed. Once all assets have been converted to personal use, click DONE to leave the assets/depreciation section.

If you  claimed any vehicle use for this rental, then you must also work through the "Vehicle Expenses" section, and remove the vehicle from the business. You can show it removed for personal use, and that's fine.

Once all the above is done, then we need to enter a completely new rental property that consists of only the 1-bedroom unit, with an in-service date of one day after you converted it to personal use. We'll get into those details once you've done the above, any questions you may have are answered, and you're comfort level is such that you're ready to move on.