Does turbotax do the math for expenses, if I rented a home for part of the year

[vinodr777]

I started renting out my home mid May last year and made that clear by putting Days Rented as the right number of days (226). I marked personal use days as 0 as we were living there longer than a year before that.

When I enter expenses, it seems like Turbotax isn't automatically doing the math to only deduct (226/365) of the mortgage interest for example. Is it on me to do this math myself? I can, but just want to make sure.

It does seem like it does the math for depreciation though because I specified the date I started using it as a business 100% of the time.

It's a bit odd it isn't doing the math for other expenses but I wanted to confirm.

[MarilynG1]

If you started renting your home in May 2023, and entered that date as 'Date Placed in Service', when asked later 'if the home was rented all year', say YES, as it is referring to 'all year from the date available to rent.'

In other words, there was no personal use after the 'date placed in service'.

TurboTax will calculate a 'Business Use %' based on the May date, and apply that to the 2023 expenses, unless you change that for any particular expense.  You can see that on Schedule E.

If you use TurboTax Desktop, in Forms mode, on Schedule E, you can indicate a Business Use % and TurboTax will calculate accordingly.  Otherwise, the default is 100% rental expense. 

@vinodr777 

[Carl]

Turbotax will only do "some" (actually very little) of the math "if" (and only if) you select the option to have the program do it for you. I do not recommend you let the program do it for you. I recommend you do it yourself.If you elect to have the program do it for you, they only thing it can "correctly" figure automatically is mortgage interest and property taxes. It can not and does not pro-rate the property insurance. This is because the insurance for the portion of time it was personal use is not deductible anywhere on your tax return. So I suggest you elect to "do the math" yourself. If the property will be a rental for years to come, you only need to do this the first year you placed the property in service.  So select the option to do it yourself that first year.

 - The program (not you) will figure the first year depreciation automatically, regardless of what you chose, based on the date you placed the property in service.

 - You manually figure the interest deduction yourself based on how many days out of 365 days the property was in service. The difference is a SCH A itemized deduction.

 - You manually figure the property taxes deductible on SCH E the same way you figured interest deduction on SCH E. The difference is a SCH A itemized deduction.

 - YOu manually figure your property insurance deduction same way as above. However, the difference is "not" deductible on SCH A or anywhere else on your tax return.

For all other rental expenses, you claim the full amount incurred starting from the date the property was placed in service, until the end of the year. There is no pro-rating these expenses.  So if you paid $100 a month for yard care that's $1200 a year. If you placed the property in service on Jun 1st, then you can only claim your costs for the last 7 months of the year, or $700 in this example.

[vinodr777]

Thanks @Carl .

Yes this is what I figured I would have to do as well. This is super clear to me. Thank you.

One quick follow-up. For the Schedule A itemized deduction, once I add the remaining interest portion I end up getting limited by the mortgage interest rules.... "You can deduct the mortgage interest you paid on up to $750,000 in loans for your first or second home".

What mortgage balance should I use when I calculate the average for the mortgage of the rental home. I am pretty sure I will be under the $750,000 across my homes if the average mortgage balance for this rental home will also factor in the fractional number of days of it being a primary residence, but I want to make sure I do that math properly as well and enter the right remaining mortgage principal balance in the schedule A portion.

[Carl]

What mortgage balance should I use when I calculate the average for the mortgage of the rental home.

Hiere's my take on it. Hopefully someone else can cite some ruling and prove me wrong.

You still have to use the original mortgage balance. That's because it was in fact, 100% personal use before you converted it to a rental, and the interest paid before it was a rental was on 100% of the outstanding mortgage balance. Before you converted it to a rental, all of that outstanding mortgage balance was subject to the $750K limitation. After you converted to a rental, none of the outstanding balance was subject to any limits.

Example: (I'm using extremely inaccurate and rough numbers here for simplicity)

On Jan 1 2023 you have a $1,000,000 outstanding mortgage balance. Your interest rate is 10% or $8,333 in interest per month.

On July 1st you converted the property to a rental and placed it in service.

For the first six months (Jan-Jun) you paid $8,333 each month in interest for a total of $10,000 in interest.

You can only claim interest paid on 75% of the balance, or $750,000. Therefore, 75% of your $10K in interest is $7,500 and that's the limit of your interest deduction on the SCH A for the first 6 months of the year.

For the 2nd six months (Jul-Dec) you paid $10,000 in interest and it's all deductible on SCH E for the period of time it was a rental, which is basically business use property. So there is no limitations there.

Again, the above is using extremely rough (but somewhat close) numbers with some very simplified (and inaccurate) math. As you know, with each monthly payment the amount of that payment applied to the principle increases while the amount applied to the interest payment decreases.

[vinodr777]

Thanks @Carl .

What is a bit more difficult for me on the Schedule A side is this is not just one home, but across 2 homes. My new primary home mortgage and what is leftover of the rental home interest. We moved from one home to the new home, and rented out the old one mid year.

Let's say for example, my primary home outstanding mortgage is 500k let's say. And the outstanding mortgage on the rental is 400k. I think what I would do is maintain the full mortgage interest of the new primary home. And calculate the proportion of the now-rental home interest subjected to the limit like this:

750k-500k = 250k.

250k/400k multiplied by the remaining interest of the now-rental property home that I would use in the schedule A. 

Does that seem right? Or any thoughts?

Also since you mentioned it a the end, when I split out the interest applied to schedule E vs schedule A, do I need to do the actual interest per the amount of interest that happened in each monthly payment or is it ok to do a more crude calculation (i.e total annual interest multiplied by # of days rented/ 365).

[DianeW777]

No, the percentage should be broken down in days for your first home.  Days the property was used for personal home divided by the number of days in the year would equal your personal portion of mortgage interest for the first home, and the remainder would be rental percentage.  You can also use your annual statement to see exactly what interest was paid each month of the year.

I agree with @Carl that the first part of the year would be applied first to the maximum threshold for home mortgage interest on Schedule A and the remainder amount would be from the second personal home you purchased later in the year to meet the total threshold allowed.

Next your formula would be correct except you are now trying to figure out how much of the second home mortgage interest you can use.  So your formula should be reversed:

The outstanding mortgage on the rental immediately before you converted it should be used.  $750,000 minus the mortgage balance on the first home (using your example) $400,000 leaves $350,000 balance that can be used from the second home. ($350,000 divided by $500,000). This would give the mortgage interest for the second home.  

• First home mortgage interest plus second home mortgage interest = allowable mortgage interest on Schedule A.  The remainder paid is not used.
• IRS Publication 936 - Worksheet 1, page 11

@vinodr777 

[Carl]

The only time I see where you would split the mortgage balance between SCH A and SCH E, would be if you were renting out "a part of" your residence. It can get more complicated if you started renting out a part of your residence mid-year.

[hpaflam]

This is what I did in 2024, and I'm having TROUBLE with turbotax. Spent my weekend trying to figure out how turbotax handles this situation, and from what I understand, it.... doesn't. Let me know if you have tips!

I rented 75% of my house for 75% of the year, so at the moment, I'm manually taking 56% (.75*.75=.56) of most of my expenses and hoping I figure something out later. Pulling my hair out trying to get turbotax to take the correct percentages of everything.

[PatriciaV]

Your best option is to calculate the correct allocations and enter them manually under "Any other expenses?" for the rental property. The portion that should be allocated to the rest of the residence would be entered under Deductions & Credits >> Your Home (mortgage interest and property taxes only).

In other words, skip the option to let TurboTax do the math for you.