Basically, you'll enter it as a "new" property (for lack of a better word). You'll be asked for the date you placed the property in service, which will be a prior year of course.
You'll also need some forms from your 2019 tax return in order to enter a few figures correctly into the 2020 program.
You should have two IRS Form 4562's for that property in your 2019 tax return. Both of them print in landscape format. One is titled "Depreciation and Amortization Report" and the other is "Alternative Minimum Tax Depreciation". Most likely, you'll only need the first one. But being that you are entering a property into the program that has been in use since before you started using the program, you will be asked for values from the other 4562 also.... even if the values you enter will be zero.
You will also need the IRS Form 4797 from the 2019 return to get your total carry over losses from, if you have any such carry overs.
When the 2020 program figures your prior year depreciation already taken, you will have the opportunity to correct that amount if it's wrong. You have to do some simple math to get the correct figure from the 2019 form 4562. Simply add together the amounts in the "prior years depreciation" column and the "current year depreciation" column on the 2019 form 4562 to get the total amount of prior year's depreciation you will enter on your 2020 tax return.
It's not uncommon for someone in your situation, for the prior year's depreciation to be off by a few bucks. That's okay if it is, as it will most likely not have any impact on your tax liability. But if what the program calculates is way off, that's usually because of one of two reasons.
1) The MACRS classification on the prior year return does not match the MACRS classification on the TurboTax 2020 tax return. It's more common for the classification on the prior year tax return (that was not prepared with TurboTax) to be wrong.
2) You misinterpreted one of the screens on TurboTax and entered an incorrect figure somewhere, meaning that the TTX program used that incorrect figure to figure the prior year's depreciation.
Now there are some screens and questions in the program that, in my personal opinion (and we call know what opinions are like!) does not provide the clarity necessary to ensure you enter the correct information and make the correct selections. So I offer the below to help with that. Some find it helpful, others find it annoying. Take your pick.
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 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 “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 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.
