Conversion of primary home to Airbnb rental, then back to primary in same year

[sweetretreathomes]

In April 2022, I began renting out my primary home on Airbnb (prior to this it was just my full time primary residence). I rented it roughly 50% of the time, and lived in the house whenever it was not rented. In September 2022, I had to stop renting permanently, so the house then just became my primary home again. For the period between April and September when my house was available for rent, I had 64 "business days" (when it was rented) and 65 "personal days" when I lived there.

I am completing Sch E Rental Properties & Royalties, and I have the following questions:

1) TurboTax is prompting me to depreciate my house. It's my understanding that I shouldn't depreciate my house since the rental started/stopped in the same year and will never be rented again. Is this correct? I see an option to delete the "rental home" as an asset.

2) For my expense deductions that need to be prorated, should I use the proration rate of 49.6% (64 / (64 + 65))? This is the amount of time it was rented while it was considered a rental property/available for rent.

3) There were many furnishings/decor items that I purchased solely because I was renting the home (new beds/mattresses, TVs, portable AC unit, etc) that I wouldn't have purchased otherwise (I didn't know I would have to close the rental). Would these expenses be considered full deductions since I only purchased them because of the rental, or do I need to prorate them since they are in the general home and I still used the home on personal days? (I didn't use the new furniture/TVs/AC/etc during personal days, although there isn't a way to prove/document that)

Thank you in advance!

[DavidD66 · Accepted solution]

You are correct, you should not depreciate you house if it was only used as a rental during 2022.  You can delete the asset.  Your rate of 49% is what you should use for allocating expenses.  As for the furnishings and decor, if you choose to deduct them, you should only deduct 49.6%.  Additionally, since you stopped renting the property, you will have to covert those items to personal use, which will result in a gain on each item.    I would not expense those items.  

[sweetretreathomes]

Thanks so much for the quick response! I was planning to deduct the furniture/decor under the de minimus safe harbor since all items were under $2,500 - would I still need to convert to personal use if I deducted in this way? I'm having a hard time finding info on what would need to be converted to personal use if deducted - for example, would items like guest bedding/towels, our video doorbell, & wifi routers need to be converted to personal use? All were purchased for the rental during the rental period.

[DianeW777]

No, you cannot write them off under the safe harbor method ($2,500 or less) because they are no longer business property.  Your situation is complicated due to the short term rental period.  If there is anything that you will no longer use and would discard, you could deduct that as rental expense.  Anything else is personal expense.  An asset that is placed in and out of service in the same year (exception is real property which is the building itself for the rental use percentage) cannot be depreciated.

Anything that you will continue to use after the rental period must be converted to personal use.  If things like the guest bedding and towels are discarded and no longer used at all, they can be an expense for the rental, otherwise there is no deduction for these items.

[sweetretreathomes]

Okay, that makes sense. Thank you for the clarification!

[Carl]

Since the property was not 100% rental for the entire tax year, the safe harbor is not an option for you.

[Carl]

Unfortunately, the program can not handle a situation where you change a property from rental to personal use, then back to rental in the same tax year. Now you can "force it" with overrides. But two things happen when you do an override. It's also possible to do it by "jumping through hoops of fire" so you don't have to do an override. But the probability of user mistakes are even higher.

- The TurboTax 100% Accuracy Guarantee is voided. So if audited, you're on your own. If the IRS finds/declares you made an error and you are penalized for it, you're on your own. TurboTax will not pay any fines/penalties the IRS (or state if your state taxes your income) may assess.

 - You can not e-file the return. Attempts to do so will be rejected. You will have to print, sign and mail the return to the IRS. It's also possible that all returns after 2022 will require an override on your part, meaning that these two items will apply in following years.

[sweetretreathomes]

Thank you - I have been struggling a lot with trying to enter this correctly into TT so this makes sense. The solution I came up with is to select conversion "From rental to primary residence" under the rental property info, and put the correct business/personal days for the rental period (64 days/65 days) under the rental type/usage. Since I am not depreciating anything, I don't have to worry about the timeline issues for that portion. For my expenses, I am manually prorating anything deductible (insurance premiums, real estate taxes, utilities, etc) to the amount applicable for the 129 day period when my home was a rental (ex. if I paid $3,000 for taxes for the year then I divide by 365 days & multiply by 129 days). Once I put my manually prorated amount in, then TT prorates it by the calculated percentage based on rental/personal use for the rental period (49.6%). Do you see any issues with this approach? The one issue I see is that I'm not sure it is clearly communicated that the rental is closed now, since I did not have to enter any "opened" or "closed" dates anywhere.

[Carl]

The one issue I see is that I'm not sure it is clearly communicated that the rental is closed now, since I did not have to enter any "opened" or "closed" dates anywhere.

I'm not sure, but I think if you work through the rental again, you will be able to select both, "I converted to rental" and "I converted to personal use". Then continue working through to enter your "to personal use" conversion date somewhere.

Then you'll have a date for conversion to rental, and a date for conversion back to personal use.

I don't think those dates have to be actual dates. It just needs to cover the total and correct number of days it was "in fact" a rental.
If you don't show a date it was converted back to personal use, then it will be imported to the 2023 tax return no matter what you select in the 2023 program next year.

[sweetretreathomes]

Unfortunately I'm only allowed to select conversion "From primary residence to rental" OR "From rental to primary residence." And the only section that allows me to input open/close dates is the depreciation section for the rental property, which is the section I need to delete since I'm not depreciating. 

I did notice that on the page where you have to put in your personal & business day numbers, there is a box you can check that says “I did not rent, nor attempt to rent, this property at all in 2022.” If I check this, then it leads me to a page that says: 

“You don't need to report Airbnb rental this year. Since this property wasn't used as a rental in 2022, you don't need to report it this year. Keep your 2022 return (or the last year it was used as a rental) along with the depreciation report. You'll need these if you sell the property or convert it back to a rental. We'll remove this property and you can continue doing your taxes.”

So if I can’t put in a conversion date, I’m hoping I can just check this box next year and then it will remove the rental?

[AmeliesUncle]

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@DavidD66 wrote:

you should not depreciate you house if it was only used as a rental during 2022. 

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I disagree.  While I realize that Publication 946 makes that comment, I think it is partly incorrect.

The Regulation clearly states that assets that are subject to the Half-Year and Mid-Quarter convention can not be depreciated it they are "placed in service" and taken out of service in the same year, that does not apply to real estate because it uses the Mid-Month convention.  There is no similar rule for that for the Mid-Month convention.

TurboTax correctly does not let you depreciate non-real estate if they are placed in service and taken out of service in the same year.  But it also correctly DOES let you depreciate real estate when it is placed in service and taken out of service in the same year.