Split Mortgage interest on 1098 due to rental property conversion, do I check the box "the interest amount is different from what on my 1098"

[speedway121]

I had 10k in mortgage interest on a rental property that was converted to a personal residence half way through the year. 

I got a 1098 from a bank that says 10k in interest paid.

On the BUSINESS part of TT Questionnaire: Report Mortgage Interest: "ENTER ALL MORTGAGE INTEREST ON YOUR FORM 1098." Despite this statement, I took 5k of interest expenses on the business side (schedule E) . There was NO option in TT to select "This mortgage interest is different from what is on my 1098 ($10k). 

When I get to the personal portion of deductions-> Do I check the box that says ""the interest amount is different from what on my 1098" and report 5k here as well? 

Is this an automatic flag for a tax return verification considering that the number on the return dosen't match the exact 1098 number and considering I am putting in a manual note?  

What is the right way to note this (or do I even need to) in TT? 

[Critter · Accepted solution]

DO NOT NOT NOT enter the mortgage interest payments twice .... (ignore the "doesn't match" crud )  you will either : 

1) manually  allocate the amount in the Sch E & Sch A sections by only entering the amount belonging to each section 

OR 

2) allow the computer to do the allocation based on the personal/rental use %

Read the screens carefully and then switch to the FORMS mode to see the allocations between the Sch E & Sch A ... review the worksheets if needed. 

Also ... #1 mistake user's make in a rental conversion that will mess you up big time ... once the home is converted to a rental you did NOT have any personal use days (unless this is a vacation home that you use between renters).  READ that screen carefully. 

[speedway121]

@Critter#2
One more question, but before I get to it-
1) Do I check the box that says ""the interest amount is different from what on my 1098" if I manually allocate interest between sch e and sch a?

2) To add a wrench in this whole thing, once the property was converted to a personal residence, I used it as my home office. The "job related expenses" portion of TT asks for the property address and also asks for the mortgage interest and property taxes paid. Do I give them the totals for these two items for the portion of the time it was a personal residence (ie $5k?).

[Critter]

1) no
2) this will take some math on your part ... you will manually need to enter all the mort int, property taxes & home insurance ... no NOT let the program do it for you.

[Carl]

Wait a minute. I'm not clear on #1. I'm interpreting it as double-dipping on the depreciation. Are you saying you converted the property to rental, *AND* use a room in that rental as a home office "while" the property was classified as a rental?

[Critter]

"once the property was converted to a personal residence, I used it as my home office"

[Carl]

Oh okay. missed that.

[Critter]

Had to read everything  3 times myself before I saw the time table ... it is messy.

[speedway121]

Hi @Carl @Critter#2 Let me clarify. From Jan - Mar the house was a rental. (3 month). From April-December it was a primary residence (9 months). The Home office was used October-December.

Property Tax Payments were Made:
Payment 1- $3k - April
Payment 2- $3k - Nov
Payment 3- $3k - Nov (doubled up to take advantage of the most deduction for 2017 before new 2018 tax plan came into effect)

Question 1:
So if I have $10k in interest total, is the below breakdown correct?

Rental Property - Schedule E ((3/12)* $10k=$2.5k) in interest.
Primary Residence - Schedule A(9/12) * 10k=$7.5k) in interest.
2106 Home Office-  (3/12)*$7.5k=1.875k in interest * Amount of house used


Question 2:
for the Primary Residence I listed above "Primary Residence - Schedule A(9/12) * 10k=$7.5k) in interest." the interest I am reporting for schedule A is $7.5k, my 1098 says $10k. DO I check the box that says this amount is different than is reported on my 1098? I just dont want to get audited for the wrong reason. I think the reason the IRS has this box is for misreported 1098, not for the splitting purpose I am doing, but just want to verify I do not Check this box.

Question 3:
Property Taxes:
From what I understand, property taxes are not prorated and are based on the day they are expensed. (I read this on several websites)
For this reason, I would take all 3 property tax payments on Schedule A. Is this correct?
For 2106 Home OFfice (3/12)* $9k= $2.25k*amount of house used.

Can you help me with each of the questions above separately so I dont get confused.

[TaxGuyBill]

1)  Mortgage Interest and Real Estate Taxes basically skip Form 2106, and go directly on Schedule A.  So you can just enter the $2500 as a rental expense, and $7500 as an Itemized deduction on Schedule A.

2)  I have no idea why it asks you that, but it doesn't really matter.  Checking that box may just ask you some additional questions.  Just make sure that the $7500 shows up on Schedule A, and you are fine.

3)  I think the taxes should be prorated.  Use 3/12ths for a rental expense, and the rest as an Itemized deduction on Schedule A (see Question 1).

[Carl]

For Q1 and just for clarity, change the word "amount" to the word "percentage" and we're in agreement. Then it will read, "2106 Home Office-  (3/12)*$7.5k=1.875k in interest * Percentage of house used". But you're going around your elbow to get to your thumb that way. TaxGuyBill's way achieves the same end result and it's a heck of a lot simpler.
For Q2 - What TaxGuyBill said.
For Q3 - What TaxGuyBill said.

[speedway121]

@TaxGuyBill TT's interview mode, when in the personal/deductions & Credits/Home Office asks "did you own this home", "How much did you pay in interest and taxes" It then attaches to one of the existing 1098's in the system. It asks when you bought the house, when you put it in service, cost of house-land, etc.

At the end of all this it culminates to 2 things 1) A total "RENT" expense that rolls up into form 2106 AND 2) A Home Office Asset which is depreciated a specific dollar amount (in my case $161). TT actually depreciated the property (as if it was a iPad). Its essentially allowing me to take depreciation on the property. I have never seen this before. Is this normal?

[speedway121]

..

[TaxGuyBill]

Although "rent" is an improper term, if it is composed of the Home Office percentage of Utilities and Repair/Maintenance, that is fine.  Yes, it is required to also be claiming depreciation on the house.

[speedway121]

@TaxGuyBill Does the home office worksheet get transmitted to the IRS? I thought it was just for our records. Essentially how we came up to the home office deduction number. I looked thru a tax return from 2014 and my accountant transmitted the worksheet with the return (it looks like). TT says "for your records" on the home office worksheet. Any idea if this gets transmitted to the iRS?