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chuhuangtina
Returning Member

Do I need to prorate rental expenses and property taxes?

Do I need to prorate rental expenses and property taxes if I only rent out the house for a few months while the rest of the year is vacant?

6 Replies
MinhT1
Expert Alumni

Do I need to prorate rental expenses and property taxes?

It depends.

 

If your rental home was vacant because you found no tenant and your rental was still available for rent, then all rental expenses and property taxes are deductible.

 

If you took the property off the rental market, then you have to prorate the expenses and property taxes.

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chuhuangtina
Returning Member

Do I need to prorate rental expenses and property taxes?

I bought the house in July 2020 and rented out in September 2020. Property taxes and home insurance I paid for was for July2020 to June2021. Mortgage interest I paid for was for July 2020 to December 2020.

1. Can I deduct half of property taxes and home insurance expenses as rental expenses?

2. Can I deduct the full amount of mortgage interest as rental expenses?

3. In general, to claim for property tax deduction for rental expenses or itemized expense, do I count for the months the bill covers or whatever the amount I paid out during the year even though the bill covers half of next year's expense(cash basis)?

Thanks!

pattif12
Expert Alumni

Do I need to prorate rental expenses and property taxes?

It depends. To clarify the situation,  did you rent the house from September to the end of the year?

 

 

Carl
Level 15

Do I need to prorate rental expenses and property taxes?

Property taxes and home insurance I paid for was for July2020 to June2021

When it comes to taxes, that is totally irrelevant. If you paid property taxes in 2020, you paid for 12 months. What 12 months those were, doesn't matter. If the property was classified as a rental from 7/1/2020 thru 12/31/2020, then 50% of your property taxes are a valid schedule E deduction, with the other 50% being claimed on SCH A.

Can I deduct the full amount of mortgage interest as rental expenses?

Using my in-service date above, no. Only 50% of the total mortgage interest paid in 2020 is a SCH E deduction.

do I count for the months the bill covers

No. The 12 month period the bill covers just doesn't matter. If you paid the bill in 2020, then you claim that percentage of the bill that covers the percentage of time the property was a rental in 2020. Whereas, if you did not pay the bill until 2021, then you could not claim any of it on your 2020 tax return.

I get the strong impression this is your first time dealing with rental property. The below information will help clarify things for you, that the program does not clarify all that well.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2nd home before, then this date is the day AFTER you moved out, or the date you decided to lease the property – whichever is later.
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 for any type of personal pleasure use 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, 2nd home, or any other personal use reasons 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 “better” the property. Basically, they retain or 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 retain or 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.

There are rules that allow you to just flat-out expense and deduct some property improvements, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.

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.

chuhuangtina
Returning Member

Do I need to prorate rental expenses and property taxes?

Yes, it was rented from September to December 2020.

Carl
Level 15

Do I need to prorate rental expenses and property taxes?

it was rented from September to December 2020.

So roughly, 4/12 of your property taxes, mortgage interest and property insurance are a SCH E expense *PROVIDED* you actually paid that expense in tax year 2020. Understand that expenses are claimed in the tax year they are paid, regardless of what tax year they pay "FOR".

For the mortgage interest and property taxes, the program does a pretty good job of doing the splits itself, allocating the property amount to the SCH E for the period of time the property was a rental, and the SCH A for the period of time it was personal use.

However, the property insurance doesn't work that way. You'll have to pro-rate that yourself. For the percentage of time it was a rental in 2020 you can claim an equal percentage of the insurance that you paid in 2020 *REGARDLESS* of the actual period of time that insurance policy covers. But the percentage of insurance for the period of time the property was *not* a rental, is just flat out not deductible at all, anywhere on your tax return.

For all other expenses, you should only be entering those expenses incurred "AFTER" you converted the property to rental property.

 

 

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