House converted to rental and refinanced in same year. How to deduct the qualifying insurance premium with a USDA and a conventional loans?

[rockcece]

We converted a personal residence to a rental in July. We also refinanced the house in July. The first loan was a USDA loan and had a mortgage insurance premium. The second load was conventional and did not have a mortgage insurance premium. 

Do I choose that both lenders had Qualified Mortgage Insurance Premiums since TurboTax is already splitting the premium between personal and rental use days? Or, do I only choose the qualified mortgage insurance premium option for the USDA loan even though it does not ask which loan covers the rental days?

[Carl]

You enter each individual 1098-Mortgage Interest Statement, one at a time. Enter the one for the old loan first. For each individual 1098 you will have a checkbox on one of the screens for "I paid private mortgage insurance". Select that checkbox for the old loan when you enter that 1098. Do not select that checkbox for the new loan, when you enter the 2nd 1098.

I am assuming this is your first time dealing with rental property, or dealing with it in TurboTax. I know you didn't ask for it. But the below information is provided for your convenience, as it provides better clarity on a number of things, that the program does not.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2^nd 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 3^rd 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.

[rockcece]

Thank you for the extensive reply @Carl. Unfortunately, I am not provided the option to enter the information as a basic 1098. This is under the Mortgage Interest area of the Expenses/assets (depreciation) section of the SE TurboTax. 

[Carl]

This is under the Mortgage Interest area of the Expenses/assets (depreciation)

First, there is no "expense/assets" section. Your wording/understanding is skewed there and can be misleading. There's an "expenses" section  and a separate "Assets/Depreciation" section.

Start over in the expenses section and work it through each screen, making absolutely certain that you look for and read the small print on each screen.  Now I'm using the CD version of TurboTax, which is what I highly recommend for "ANY" first time user of the program. For a new users, I do not consider the online version to be "user friendly" at all. But then, we're all entitled to our opinions too.

Here's a screen shot to show you exactly where the PMI box is on the desktop version. Circled in red. Take note that I had to scroll down in order to see it. The scrolling isn't an issue really, since you have to scroll down anyway, to get to and click the Continue button.

Do I choose that both lenders had Qualified Mortgage Insurance Premiums since TurboTax is already splitting the premium between personal and rental use days?

The program doesn't ask you for the PMI for each lender separately. It's asking for the total amount of PMI paid, and "to all lenders" is not clarified. But that's what it is. Keep in mind that the PMI is deductible in total, and it flat out does not matter which lender you paid it to either. In the end, the program just adds all the PMI and mortgage interest payments together (for the rental property) and that total ends up on line 12 of the SCH E in the column for that specific rental property.

[rockcece]

@Carl , I appreciate your advice and time. I included a screen shot for clarity as I am unable to follow your advice. It is not consistent with the scenario in Turbo Tax SE Online. I also appreciate your concern for new users. I have been using TurboTax online since 2013 (as I found the desktop version more cumbersome) and have had rental property since 2014-just not this scenario. Unfortunately, I am still working to understand some of its nuances of  the program as new scenarios arise. 

To locate the screen in question one can follow these headers: Income and Expenses: Rental Properties and Royalties (Sch E): choose the specific rental property: Expenses/Assets (Depreciation) : Mortgage insurance or Mortgage interest:

 

Loan 1 carried the USDA mortgage insurance and was a primary residence only. Loan 2 was a primary residence part of the time in 2020. Since I cannot designate which loan carried the USDA insurance or how many days it was in service as a rental, do I:

- select yes for both houses since TurboTax will allocate your personal portion of qualified interest over to the deduction section for me? (Even though most of the interest of loan 2 was for days it was in service as a rental and loan 1 carried 0 rental service days.)

- hold from including the USDA insurance here and only include it in the personal section?

Thank you for your extensive help. 

[Carl]

There's a question/concern at the end of this post. Don't miss it.

Wow! They've really changed the screens and presentation with the online version. I personally find the online version to be extremely limited in it's capabilities. For example, with the CD version I can switch to forms mode and see the actual forms. You can't do that with the online version until "after" you pay your online turbotax fees. But once you pay those fees, it's just not possible to "clear and start over" with the return, if you need to. It's easy with the CD version. Just delete or rename the .tax2020 file, and it's just like you are starting the CD version of the very first time, when you fire it up.  But enough of my rambling.

yes for both houses since TurboTax will allocate your personal portion of qualified interest over to the deduction section for me?

I assume you mean both "loans", as there's only one property involved here. Or did I miss something?

You'll select yes for both 1098's, because the interest is qualified. It's qualified, because the loan was/is secured by the property the loan was for.

As for the pro-ration, it's based on the total interest paid during the tax year on the property, regardless of how many lenders you paid that interest to during the tax year. So basically, if you placed the property "in service" on say, Dec 1st for example, then roughly 1/12 of that total interest paid during the tax year is claimed on the SCH E as a rental expense, with the remaining 11/12 of the interest listed as an itemized deduction on the SCH A for the 11 months it was your primary residence.

This will also hold true for the PMI you paid in that first year. But it's really no big deal that only 1/12 (roughly,  using my in service date) of the PMI will be a SCH E expense the first year with the remaining a SCH A expense. If the property remains classified as a rental for the entire 2021 tax year and beyond, then the PMI will be fully deductible on the SCH E from 2021 and forward.

Also keep in mind that chances are pretty good that the total of all your SCH A deductions will not exceed your standard deduction. So it's a good bet that even if you claimed all the interest and PMI on SCH A, it still wouldn't exceed your standard deduction and would have no impact on your tax liability. So claiming only 1/12 of that PMI on the SCH E is better than not being able to claim a penny of it on the SCH E.

You say you refinanced this property in 2020. Assuming Loan 2 is the new loan, I take special note that you paid more interest on the new loan in 2020, than you did on the old loan. There's a number of reasons for that, as we both know. But the concern I have is the amount you refinanced.

If you did a refinance of the property and took a "cash out", that has an impact on the amount of interest you can actually claim. Whereas if all you did was refinance the property for the balance due on the old loan at the time of the refi, then there's no cash out and nothing to be concerned about here.

[rockcece]

@Carl Thank you for that explanation. Yes, I meant both loans in this instance. 

Also, thank you for checking in about loan 1/loan 2. My 2nd loan's interest is indeed lower than the 1st's. All the data on the screenshot I sent was just placeholder data. I removed my actual information. 

Thank you again for the thorough responses.