How do I convert owner-occupied duplex to full rental for 2018?

[dave10]

For the past several years I have had our duplex entered as one property and let Turbotax calculate the expenses and deductions at 50% -- meaning 50% of the duplex was used as rental and 50% was used as personal residence.

We moved out-of-state and in January 2018 we rented our side the of duplex.  So for all of 2018 both sides have been fully rented.

How do I convert the side of the duplex that was personal to rental?

I have read various posts that talk about splitting the rental into two properties, but I'm not sure how to do that, or if that is even the right approach for my situation.

Under Business -> Business Income and Expenses -> Do Any of These Situations Apply to This Property?  I see the option "I converted this property from a rental to personal use in 2018"

But I didn't convert the *entire* property to rental, just 50% of it.  So I'm not sure checking this option is the correct response.

How do I correctly tell TurboTax that I want to convert the half of the duplex property that was personal to rental?

[TaxGuyBill · Accepted solution]

If it is two separate units, you should report it as two separate units.

For the one that was your personal unit, you enter it as a new rental property, and for the "asset" for depreciation, you enter January 2018 as the "placed in service date".  You will enter 50% of the total Basis (plus or minus any Basis adjustments on the that unit) and say it was used 100% for rental.

For the 'old' rental side, you also report would report 50% of the expenses and 50% of the Basis (and 100% of the "prior depreciation") for the asset for depreciation, using the original "placed in service date".  You also say it was 100% rental.

So the end result is that you have two rental properties, each claiming 50% of the expenses and 50% of the Basis for depreciation, and both are being 100% rental use.

Does that make sense?

[dave10]

They are two separate units with their own entrances -- a 1st floor unit and 2nd floor unit.  Both identical.  They share a common basement and attic.

I'm not sure what you mean by "total Basis" and "Basis adjustments".  What are those?

I'm following your suggestion and entering our side (which was 2nd floor) as a new rental property.  TurboTax is now asking me:
  * the cost of the property (amount I paid for it)
  * the cost of the land
  * date purchased or acquired

I have no idea what the cost of the land is.  What would I enter there?

I do know the amont I paid for the duplex and date I acquired it.  But, would I actually enter the purchase price and date for the entire duplex even though I already have this entered for the "old side"?

Or should I enter the date this unit was put in service (Jan 2018)?

[TaxGuyBill]

Total Basis is usually your original cost, plus cost of improvements.

Basis Adjustments include depreciation (such as from a Home Office), improvements, and more.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p551.pdf#page=5">https://www.irs.gov/pub/irs-pdf/p551.pdf#page=5</a>

What did you enter for land for the original rental property?  Your property tax statements may have an allocation of building versus land.

I *THINK* it asks for both the original purchase date AND the "placed in service" date.  If it does not ask for both (keep going a few screens), then you would need to go back and enter the "placed in service date" (January 2018) where it asks for the date purchased.

[dave10]

Okay, yes, it did ask for both purchase date and date of service.  

And thank you for referring me to the property tax statement -- the land value/assessment was on it.  

But I think that perhaps I messed up when I set up the original property back in 2006.  I see that I have zero for the land value and only entered the cost of the duplex property.  Do you uthink I should bother trying to fix that, or let it go at this point and hope for the best?

Getting back to your original response--so when it asks me for the amount I paid for it (the Basis) for the "new unit" (floor 2) that was our personal use, are you saying that I should enter 1/2 the value I paid for the duplex and 1/2 the land assessment value?  And do the same for the "old unit"?  Right now both units are lumped under one property in TurboTax.

For the "old unit" (floor 1) I have several improvements that are being depreciated that were common to both sides, such as new basement block windows, new porches, driveway paving, attic renovation as well as one improvement specific to old unit (kitchen remodel).

What should I do with all these depreciations?  Do I duplicate the common items for both untis and just enter 1/2 the value for each unit?

And thank you for all your help with my questions.  This is like trying to unravel a tangled ball of string!

[TaxGuyBill]

Yes, that is how I would do it.

However, for the common improvements for the 'new' property, you need to enter the LOWER of (1) the Basis (cost) and (2) the Fair Market Value at the time of rental conversion.

For example, let's say you spent $5000 on the driveway several years ago and the Fair Market Value of the driveway is now $4000 (it is starting to get worn out).  The 'old' property would show $2500 for depreciation (50% of cost), but the new property would show $2000 (50% of the lower of (a) cost and (b) Fair Market Value).

[dave10]

Okay, thanks, that makes sense.  I'm going to have to pick this back up tomorrow to finish.  Thank you for your help!

[dave10]

Hi TaxGuyBill--I'm returning to work on this and splitting up the duplex into two property entries in TurboTax and see that in prior years I entered a couple of renovations incorrectly.  For example, I entered the driveway resurfacing as 100% business use on my 2013 taxes.  I think that I should have entered that as 50% business use since we were living in the other 1/2 of the duplex.  I was thinking of it wrong--more like common area that pertained to the duplex rental as a whole.

So... now I'm not sure what to do since the depreciation was based on the full cost basis of the driveway since 2013.  I'm thinking that I can:

(1) leave it as-is and keep it as 100% under unit 1 and don't enter anything for it for unit 2 (which was our personal space until Jan 2018), even though that is probably wrong, or

(2) change it to 50% for unit 1 (and halve the cost basis and prior depreciation?) and add it as 50% (FMV) for unit 2 with no prior depreciation

Do either of those options make sense?  Would option 2 totally mess up calculations moving forward?  Or is there a better idea?

[dave10]

Ah... nevermind.  I finished following your instructions to separate the duplex into two properties and it looks like Turbotax sorted out the issue just fine with business use at 100%.