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jaysiz
Level 2

a 2 house property that has been subdivided, how to claim rental income / depreciation

Hi Guys. I'm working on my taxes and I bought a property that had 2 houses on it. it started at a rental that I purchased for $570k. I finished subdividing the property and am trying to figure out how to claim the new property as a new rental, as before I was claiming it as a single property, multifamily initially on my 2019 taxes. For my 2020, it's 2 different properties, and I want to claim them separately, claiming rents on both, I'm trying to determine how to adjust or make sense of the adjusted depreciation / initial cost into turbo tax for the 2 separated houses. Is it possible? or do I just claim the new adjusted as a new property with no initial cost? 

 

for easy math sake, let's say property 1 new tax assessed value is at 170k, and property 2 is at 400k. 

 

any help is appreciated. Thank you. 

4 Replies
Carl
Level 15

a 2 house property that has been subdivided, how to claim rental income / depreciation

There are several ways to do this. I will cover the easiest/simplest.

Indicate that you converted the multi-family unit to personal use in 2020. (You pick the date, based on your paperwork for sub-dividing).  When done, with that conversion entirely, work through the assets/depreciation section and for each individual asset write down the total depreciation taken. The total depreciation taken will include prior year's depreciation, and the current year's depreciation up to the date you converted it to personal use.

You will also need your cost basis on the property, which is sown on the screen with COST and COST OF LAND on it. Those values will matter. COST is what you paid for the property in it's entirety when initially purchased. COST OF LAND is that portion of COST that was allocated to the land.

 

Now you will enter two entirely new rental properties, one at a time.

Fist, you must divide your COST between the two by whatever you determine is reasonable and realistic. It could be a 40/60 split, or something else. then you will reduce the cost basis for each individual property by the depreciation already taken. You can split the depreciation between the two properties, using the same percentages that you split the cost basis.

Then you have to assign a portion of that cost for each individual property, to the land for each individual property.  Now here's the tricky part.

For both of the "new" properties, when you add together the value of the land for each, the total must equal the original value of the land when it was a multi-family unit. This is because land is not a deprecated asset.

The "new" value in the "COST" box for each property will be reduced by the amount of depreciation already taken on that property. Then depreciation will start over from the new "in service" date. That new "in service" date for each property, must be at least one day "AFTER" you converted the multi-family unit to personal use.

Depreciation for each property will start over and will be depreciated based on the new "adjusted" cost basis for each property, over the next 27.5 years.

 

jaysiz
Level 2

a 2 house property that has been subdivided, how to claim rental income / depreciation

Wow Carl, thanks! that definitely makes sense. 

Carl
Level 15

a 2 house property that has been subdivided, how to claim rental income / depreciation

Glad to help. Just understand that this means for 2020 you will have three rentals on the SCH E. The multi-family setup will be in column A, and the "new" unit 1 (for lack of a better name) will be in column B, with the "new" unit 2 in column C.

I do want to stress that you make absolutely certain that on the multi-family setup, you convert "everything" to personal use. Each individual asset, one at a time. Also, if you claimed any vehicle use on the multi-family unit, you must also show that vehicle removed for personal use. Doesn't matter that it was less than 100% business use, or that you only claimed it in a tax year prior to 2020. If it's not done right, then the multi-family will be imported into your 2021 taxes next year.

Now there are situations where you do "in fact" do everything correctly. Yet, the property that is no longer a rental gets imported anyway. When that happens, and you are 100% certain you did everything right the prior year, you can just delete that property from the 2021 tax return and press on with life. You'll be fine.

 

jaysiz
Level 2

a 2 house property that has been subdivided, how to claim rental income / depreciation

Thanks for that! I would of definitely missed this. 

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