I converted my primary residence to a rental property mid-year. Can expenses such as repairs/upgrades/cleaning for the rental be applied only to rental, not prorated?

[rebecca-a-gelb]

I understand why real estate taxes and premiums are split between rental time period and personal use, but we have expenses, upgrades, cleaning specific to the rental that it seems like should be applied only to the rental portion of the year.

[DianeW777]

Yes, you are correct.  Keep in mind that once you converted it to a rental it was 100% rental use.  TurboTax knows how to do the depreciation based on the date placed in service (converted to a rental). Do not alter the cost basis (see below).

For the property asset you will select residential rental and use the full cost of the property, including capital improvements such as a complete remodel of a room or rooms as example, or the fair market value (FMV) on the date of conversion, whichever is less. You can use the city or county tax assessment to determine the portion that should be land.

As far as repairs, cleaning, etc., after it was converted, all expenses to maintain the property are deductible after the date placed in service, as long as it was available for rent.  As you indicated, you must prorate the real estate taxes and the mortgage interest and insurance.

Also, the rent must be at least fair rental value or losses will not be allowed.

• IRS Publication 527

[Carl]

It would appear this is your first time as a landlord - or at least in dealing with this in TurboTax. Note that on some things the program does not provide the clarity I think it should. (just my personal take on this). Therefore, the below information is provided for your convenience, if you find it helpful.

When dealing with rental property, absolute perfection in that first year is not an option. It's a must. Even the tiniest of mistakes can (and will) grow exponentially over time. When you catch the mistake years down the road (usually in the tax year you sell the property) the cost of fixing it will be high. So if you have detailed questions as you work it through, by all means ask!

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.
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 Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.

Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.

Expenses for these types of costs 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 need to 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 instead of capitalizing and depreciating them, 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 its assets in the usable 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 for the very first time are not deductible.

Repair

Those expenses incurred to return the property or its assets to the same usable 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 for the very first time 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.

[sweetjulia]

I probably know why you are asking this as I am running into the same question!

Then i kinda figured out after scrolling thru pages.

My guess is in property info when it asked how many days is your personal use, you should have entered 0, as the software was asking how many days were used as personal use AFTER property was converted as rental.

Hopefully it helped 😄

[RickM5]

Carl - Very helpful info here.

1.  What is the official start date for depreciation - "Date of Conversion" or "In service date?"

2.  Hypothetical example here, but if I understand what you are saying about the tax code correctly, could someone have declared their "date of conversion" and "in service date" as 12/31/22 and then taken the whole 100% bonus depreciation for 2022?

Thank you!

RickM

[Anonymous_]

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@RickM5 wrote:

1.  What is the official start date for depreciation - "Date of Conversion" or "In service date?"

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See https://www.irs.gov/publications/p527#en_US_2022_publink1000219036

Conversion to business use.

If you place property in service in a personal activity, you can’t claim depreciation. However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. You place the property in service for business or income-producing use on the date of the change.

[Anonymous_]

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@RickM5 wrote:

.....could someone have declared their "date of conversion" and "in service date" as 12/31/22 and then taken the whole 100% bonus depreciation for 2022?

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You would begin to depreciate (recover the cost) on the date the property is placed in service. 

Note that residential real estate has a 27.5 year recovery period (i.e., it is depreciated over that time period). Further, the method is straight-line (equal deduction each tax year) and the convention is mid-month. As a result, if you placed your property in service on 12/31/22, it is treated for tax purposes (depreciation) as having been placed in service on 12/15/22 (mid-month). 

Also note there is a de minimis safe harbor for tangible property and also for routine maintenance (but neither would be applicable to real estate).

See https://www.irs.gov/publications/p527#en_US_2022_publink100071091

[Carl]

1. What is the official start date for depreciation - "Date of Conversion" or "In service date?"

It's the in service date. The MACRS class of residential rental real estate uses the mid-month convention. So regardless of what day of the month you place the property in service, depreciation is figured from the 15th of that month.

2. Hypothetical example here, but if I understand what you are saying about the tax code correctly, could someone have declared their "date of conversion" and "in service date" as 12/31/22 and then taken the whole 100% bonus depreciation for 2022?

No. The MACRS classification of Residential Rental Real Estate is not eligible for SEC 179 or SDA Bonus depreciation. It gets depreciated over 27.5 years. (30 years for foreign rental property placed in service after 2017).

Keep in mind that depreciation is not a permanent deduction. Whenever you sell or otherwise dispose of the property you are required to recapture that depreciation and pay taxes on it in the year you sell it. You have to recapture the higher of the depreciation taken, or depreciation you should have taken. So don't think that not depreciating the property will get you out of that. It won't.