I bought a duplex in May2020. I did not live in it. 1 side came with renters that stayed and I rented out the empty side July 1st. How do I enter the purchase information as each side has its own address. I am getting conflicting advice to enter them as separate properties and split the purchase numbers. I repaired alot of issues on both sides and installed central air units on each. I did not plan to, but i ended up moving into one of the units January 2021 so I want to make sure i do this right so I don't mess myself up for 2021 tax year.
There are multiple ways to do this. However, since the units do have different physical addresses, I would recommend you enter each unit as it's own physically separate rental property. In my opinion (and we all know what opinions are like.) doing it this way gives you greater flexibility in the future. Say for example, should you decide to sell one of the units, or make one of the units your primary residence. Having them entered as separate properties in the TTX program will make such scenarios easier to deal with, should the need ever arise.
Assuming the units are the name (or mirror or each other) just split everything down the middle and enter 50% for each unit. If this is your first time dealing with rental property, or first time dealing with it in TurboTax, the below information should help clarify things for you, that the program does not clarify.
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 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.
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.
Thank you for your response!! I totally appreciate your information. So, should I also split the purchase price in half and enter each side as 50% of the total costs, taxes, insurance and interest paid, etc? What are your suggestions about deciding to depreciate or claim expenses for each unit?
So, should I also split the purchase price in half and enter each side as 50% of the total costs, taxes, insurance and interest paid, etc?
That's what I would do. That way, if later down the road you decide to move into one of the units as your primary residence, simply removing that unit from service without affecting the other unit, is a piece of cake. Anything could happen down the road necessitating the need to convert one of the unit's to personal use. Happened to me with one of my rentals when my daughter left her ex and needed somewhere for her and my grand daughter to live. So never say never, or karma will bite you big time!
What are your suggestions about deciding to depreciate or claim expenses for each unit?
That's really not something that one can "suggest" and not a choice you get to make. You're required by law to depreciate rental property. You're also required to claim any and all expenses incurred.
When it comes to depreciation, many folks are of the mistaken belief that it's a "permanent" deduction. It's not. When you sell or otherwise dispose of the property in the future, you are required to recapture that depreciation and pay taxes on it in the year of sale/disposition. You don't have a choice.
Now if you don't depreciate the property, then in the year you sell/dispose of the property, you are required to reduce your cost basis in the property by the depreciation you "should" have taken, and then figure your gain/loss from that adjusted cost basis. So either way, you lose.
In the year you sell/dispose of the property, the recaptured depreciation increases your AGI for that tax year, and has the potential to bump you into the next higher tax bracket. So I try to keep the depreciation I'm required to take on my 3 rental properties, as low as I legally can.
Overall, you are going to find that "on paper" at tax filing time, you will show a loss each and every year the property is classified as a rental. Basically, when your rental expenses (including the depreciation you're required to take) get's your taxable rental income to zero (and it will) that's it. (Exception below). Any excess loss is just "carried over" to the next tax year, where it can be deducted "if" you have the taxable rental income to deduct it from. (You won't.)
So your carry over losses will just continue to grow each passing year. You can't "realize" those losses until the tax year you sell/dispose of the property.
EXCEPTION: If you are "actively involved" in the rental activity (most landlords are) then you are allowed to claim up to a maximum of $25K of "excess" losses each year against your other "ordinary" income. (The losses that exceed the rental income.) So it's perfectly possible that while you're taxable rental income will be zero each year, you will never have any carry over losses to get transferred to the next year.