Not sure the best way to handle this situation - do I have the options correct, missing anything great?
Intended primary house purchase has leaseback of greater than 1 year. Expenses are considerable, but rent income will exceed. Debateable whether or not it was done "for profit".
Available options:
1. Other income on sch 1, line 8 - but pub 527, p16 and pub 535 p6 seems to strongly imply if this approach is taken that expenses CANNOT be deducted against rent as it isn't "COGS", that only sch A could be used (and given tax law changes, itemization isn't viable)
2. Do a schedule E in order to claim expenses but have exposure to recaptured depreciation hit and future possible home sale recapture nonsense (painful, but possibly best recourse)
3. Reduce home basis by income net of expenses -- even though leaseback was in original sales contract and first month rent included at closing this seems particularly murky especially for such a long duration (and is typically "professional opinion" and not in IRS documentation)
4. anything else I'm missing?
Saw this post but wasn't sold on it: https://ttlc.intuit.com/community/taxes/discussion/how-to-handle-a-leaseback-on-a-new-home-purchase/00/286028
Based on what you are saying, number 2 is the most correct way to handle the rental income and expenses.
Basically, setting up the property as a straight rental is the way to go. Recapture of depreciation can be a pain but TurboTax makes it relatively easy. Just keep a record of your depreciation with your other home documents and add it in when you sell the property.
The link you had at the end was talking about a home rented for less than a year and then pulled out of the rental market. You would not be able to use the same method of avoiding depreciation for your home rented for more than a year.
greater than 1 year.
That alone makes this an investment purchase, like it or not. You'll report the acquisition/purchase of this property on SCH E as a part of your personal 1040 tax return. Nothing will be claimed as a SCH A itemized deduction concerning this purchase. It's all on SCH E.
Basically, when you're done with the tax return you'll more than likely find that (99% or higher) you won't be paying any taxes at all on the rental income. Since this will be your first time as a landlord (I assume) the below guidance is provided so that you correclty enter this in the TurboTax program.
Understand that absolute perfection in the first year is not an option. It's a must. Even the tiniest of mistakes *WILL* come back to $BITE$ your wallet hard, years down the road. So if you have questions or need further clarification, the only stupid question will be the one you didn't ask.
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.