If you will work through the program the way it is designed and intended to be used, you will deal with the rental property long before you get to the "your home" section under the deductions and credits tab.
In the Rental & Royalty Income (SCH E) section of the program you will be given a choice to either split things yourself, or to let the program do the splits "for you". I recommend you elect to have the program do the splits "for you". Here's what will happen.
- In the rental expenses section two of the many expenses you will be asked for is property insurance and property taxes paid in 2019. Enter the total amount paid for the entire year. (I am assuming you actually paid these items in 2019. What tax year you paid "for" is irrelevant and doesn't matter.)
- At the very end of the expenses section you will be asked for mortgage interest paid, and other information from the 1098-Mortgage Interest Statement you received from the lender. Enter that 1098 exactly as printed.
When you get to the "your home" section it's important to read the small print. You will see that the program has done the "splits" for you.
Now I've seen some scenarios which I've been able to duplicate on an inconsistent basis, where you are not offered the option to have the program do the splits for you. If you are not offered that option, then you have to do the splits manually yourself.
- In the expenses section you only enter those expenses incurred during the period of time it was classified as a rental. Expenses incurred prior to that are just flat out not deductible. Period.
- For the real estate taxes you will enter the pro-rated amount that you will prorate on a 12-month period regardless of when you paid those taxes in 2019, and regardless of what period of time those taxes are for if the time period crosses tax years.
- While you will pro-rate the property insurance, you only enter the amount for the period of time it was classified as a rental. Insurance for the period of time the property was personal use is just flat out not deductible anywhere on your tax return.
- You will have to manually pro-rate the mortgage interest. This has the potential to be a problem when you enter the "split" later, under the Deductions & Credits tab in the "Your Home" section. But so long as you read the small print on each screen you should be fine.
- When you get to the assets/depreciation section, you "MUST" work through the property asset listed in that section. You will indicate that "I purchased this asset new" and that it was "NOT" used 100% for business. The date you started using it in the business will already be filled in. Don't change that date. But the percentage of business use for the entire year will be wrong at 100% and you'll need to enter the correct percentage. Just count the number of days it was classified as a rental, and divide it by 365 to get your percentage of business use for 2019. You can round that number up or down to the closest whole percentage point. I think that does it for "the details" I know you need. Here's some more information that will provide even more clarity for you.
Rental Property Dates & Numbers That Matter.
Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.
RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property Improvement.
Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.
To be classified as a property improvement, two criteria must be met:
1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.
2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.
Cleaning & Maintenance
Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.
Repair
Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.
Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.
However, when you do something like convert the garage into a 3rd bedroom for example, making a 2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.
