I closed on a condo on 5/4/21. At that time the property was tenant-occupied and I assumed ownership of their lease. The tenants occupied the property until their lease ended on 6/30/21 and I moved in two days later. The condo was my primary residence for the remainder of 2021.
I received prorated rent for May from the condo's seller as a part of the closing transaction and a rent payment from the tenants for June. During 2021 I paid insurance, mortgage interest, HOA dues, and repairs on the condo.
I entered all of this into TurboTax and it is giving me a depreciation credit I don't think I should have. Here is how I entered the information into TurboTax:
"Tell us about your situation this year"
-> "First year rented"
-> "Converted home to rental or rental to home"
"How was condo converted?"
-> "From rental to primary residence"
Then TurboTax tells me:
Since your rental became your home, we'll walk you through stopping depreciation on your rental property and rental assets in the Assets section later. Make sure to keep a copy of your depreciation report, you'll need it if you sell the property.
I then filled out the rest of the information (expenses, etc.). When I click on the Edit button next to the "New rental property" text under the "Assets" heading, I reach a screen that says:
"Congrats on renting out condo for the first time!"
Since this was your first year renting this property, we’ll determine its cost basis and depreciation. We’ll calculate this based on info from closing documents such as a HUD-1 settlement statement. You’ll only have to set this up once and we’ll automatically calculate your deduction each year.
I then answered the following questions:
"Was this property your residence in the past?"
-> No
"Did you purchase this property?"
-> Yes
I then went through several more screens of entering purchase information (original purchase price, purchase date = sale date, escrow fees, property tax info, etc.) and finally reach a screen that says:
Rental expense deduction
$7,292
The deduction appears to be due to depreciation but I don't believe it applies to my situation. IRS Publication 527, page 6 says (https://www.irs.gov/pub/irs-pdf/p527.pdf:(
Excepted property. Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated, you can’t depreciate the following property.
• Property placed in service and disposed of (or taken out of business use) in the same year.
Given the above, is this a problem and how do I fix it? Did I answer a question incorrectly during the interview?
