how to handle mortgage interest on home rented for part of the year

[dkahn04]

I recently became aware that we didn't do our 2020 taxes correctly, and we did it in a way that means we'll get more money back if I amend it.

We moved overseas for our work, but plan to return to the house.  The house was our primary residence until 1 September 2020, and has been rented out ever since.  I've figured out that I put all of our interest and property taxes in the "rental property" section rather than in deductions, and let TurboTax divvy it up by how long we rented it out. 

What I don't understand is the "qualified interest" question, which it says is asking if this is my primary home or not.  It wasn't at the end of 2020, but it was for the first 8 months.  If I click no, it zeros out the interest I can deduct.  It is the only home I own and I will eventually move back to it.  Do I say "yes" for qualified interest?

[ColeenD3]

I'm not sure how you initially set up the property. The correct way would be to say that you converted from personal use to business use in September. Sometimes people get confused and think they enter personal use days, but you would not in a conversion.

The easiest way to avoid confusion is to include the personal portion of the interest on Schedule A and the business part on Schedule E.

[Carl]

Here's some guidance for when converting a property from personal use (such as your primary residence) to residential rental real estate.

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 was contracted to move in, and/or "could" have moved in. That would be your "in service" date or after if you were asked for that. Vacant periods between renters do not count for actual days rented. Please see IRS Publication927 page 17 at https://www.irs.gov/pub/irs-pdf/p527.pdf#en_US_2020_publink1000219175 Read the “Example” in the third column.
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. If you stayed at or lived in the property for the purpose of getting it ready to rent, then those days "do not count" as personal use days.
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.

[dkahn04]

I understand it is 100% business after I moved out, but TT isn't making that distinction.  If I click "yes" on qualified interest, then it prorates it to my personal deduction for the first 8 months, and rental expenses for the last 4 months.  If I click "no," then it just zeroes it out completely.

[Carl]

If I click "yes" on qualified interest, then it prorates it to my personal deduction for the first 8 months, and rental expenses for the last 4 months

That's exactly what it's supposed to do. The first 8 months is a SCH A itemized deduction since the property was not a rental during that time, and the last 4 months are a SCH E deduction. Or am I missing something and just not understanding things correctly?

[dkahn04]

No, you understand correctly.   I was just confused because the question "was this your primary residence" came during the "rental income" part of the software.  The answer to that is an obvious no for the rental period, which is why I was confused, but since it divvies it up by entering yes, I'm assuming I did it correctly.

Thanks for the advice.

[Carl]

"was this your primary residence"

That's odd. To me at least.  If you did not sell the property in 2021, ignore the below.

This question comes up when you are reporting the sale of the property. If you sold the property in 2021 and it was "in fact" your primary residence for any period of time you owned the property, the answer to that question is YES.

If you answer that question no and you qualify for the "lived in 2 of last 5 years I owned it" capital gains tax extension, then the program will not ask you the questions pertaining to when it was your primary residence, and you will "NOT" get the tax exclusion.

Since you did not sell the property, I don't know why you're being asked that question.