In the Enter Escrow Fees section for rental properties, do I enter the fees that were financed, i.e. closing costs included as part of the loan, or just fees that were paid directly?
THere is no such place in any version of TurboTax that asks for escrow fees. Money you pay into an escrow account is not deductible on any tax return. Money in escrow remains "your" money until such time that the escrow account manager uses that money to pay for something, such as property taxes. If the amount paid is a deductible expense (such as property taxes) then you get to deduct only the amount paid, and only in the tax year it was actually paid.
So just exactly what is it you're being asked for? Is this for a property that you purchased in 2020 with the intention of renting it out? Or is this for property you already owned and you are converting it to rental property 2020?
First things first.
If you are using the online version of Turbotax, *DO* *NOT* pay your online fees until you have completed your tax return. Since you've never dealt with rental property before with TurboTax, you can expect to want to clear your return and start over from scratch, more than once during this process. Once you have paid your online fees, the option to "clear and start over" with your return is *NOT* available. Even if TurboTax refunds you those fees, that will "NOT" unlock the ability to clear the return and start over. So consider yourself forewarned on this.:)
If you work through the SCH E section of the program the way it's designed and intended to be used, then it's practically impossible to miss anything. Just make sure you read every work on each screen. Also, attention to detail is important. For example, "select all that apply" and "select the one that applies" have different meanings.
When it comes to those things you can claim, I'm guessing you're referring to those costs you may have paid at the time you purchased the property. It doesn't matter if you purchased the property years ago either. There's two basic types of costs.
-Cost associated with acquisition of the property are added to the cost basis of the property. They are capitalized and depreciated over time. An example of such a cost would be the transfer fees paid at the court house to take the seller's name off the deed, and put your name on it. The TTX program does a pretty good job of just adding these costs to the cost basis of the property, so you don't have to break it down yourself on the depreciation report.
-Cost associated with acquisition of the mortgage loan are amortized (not capitalized) and deducted (not depreciated) over the life of the loan. An example would be if your lender required a property survey as a part of the loan application/approval process and you had to pay for that survey, then the cost of that survey is a mortgage acquisition cost. The program does not always do a very good job of separating amortizable costs out, and you may have to enter these yourself in the assets/depreciation section. Once you've finished the rental section in it's entirety you can print out the IRS Form 4562 titled "Depreciation and Amortization Report" and take a look at it. If you don't have an item called "Amortization" in the description column of the 4562, then you either did not have any loan acquisition costs, or the program didn't property classify those costs. It's an easy fix though, with a minimal bit of math on your part.
Origination fees usually include pre-paid interest, and that gets amortized and deducted over the life of the loan.
Since you converted this property from personal use to rental property in 2020, if the program gives you the option to do the splits for you, then do take that option. That way, you will enter total amounts and the program will do the split between the SCH E for the period of time it was classified as a rental, and the SCH A for the period of time the property was personal use.
Generally, the items I think you are referring to, will be dealt with the Assets/Depreciation section when you get to that point. There are a few things that in my personal opinion, the program does not clarify as well as I believe it should. So I've provided that clarification for you below.
Take note that absolute perfection on setting this up in TurboTax in your first year is not an option. It's an absolute must. Even the tiniest of mistakes will grow exponentially over time. Then when you catch it years down the road, the cost of fixing it will be expensive. So if you have questions, by all means ask. The only dumb question is the one you didn't ask.
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 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 usable 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 the first time are not deductible.
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 the first time 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.