327661
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
Announcements
Attend our Ask the Experts event about Tax Law Changes - One Big Beautiful Bill on Aug 6! >> RSVP NOW!
Close icon
Do you have a TurboTax Online account?

We'll help you get started or pick up where you left off.

vortegal
New Member

I'm closing a house as my primary residence, but it's rented until end of March. I will have to live on rental myself until the property is vacant. Anything to consider?

We're currently leasing our primary residence. We've seen a house we like and will close this year. Unfortunately it´s rented until end of March and the renter does not want to live. If we close in December the previous year and move to the new house as soon as the renter leaves, could we deduct the mortgage interest for the new house?

x
Do you have an Intuit account?

Do you have an Intuit account?

You'll need to sign in or create an account to connect with an expert.

5 Replies
Carl
Level 15

I'm closing a house as my primary residence, but it's rented until end of March. I will have to live on rental myself until the property is vacant. Anything to consider?

When did you start renting out the property that is currently rented? If it's rented out now, and you haven't closed on the new house yet, where are you living now? (as a tenant in a rental you don't own, I presume. But I don't like to make assumptions)

I'm closing a house as my primary residence, but it's rented until end of March. I will have to live on rental myself until the property is vacant. Anything to consider?

If you rent the home out to the person living them, yes, the mortgage interest is a deduction against the rental income that you receive.

When you eventually sell the new house, you can usually 'exclude' (not pay tax on) up to $250,000 ($500,000 if Married Filing Jointly) of the gain.  However, if you are renting it then move into the home after the rental, that $250,000/$500,000 will be prorated based on the time it was your Main Home, versus the total time you owned it.
Hal_Al
Level 15

I'm closing a house as my primary residence, but it's rented until end of March. I will have to live on rental myself until the property is vacant. Anything to consider?

Yes, you can deduct the mortgage interest. part of the deduction will go on schedule E to offset the rental income and the rest on Schedule A
Carl
Level 15

I'm closing a house as my primary residence, but it's rented until end of March. I will have to live on rental myself until the property is vacant. Anything to consider?

Mortgage interest as well as the property taxes are deductible. Period. Where you deduct it on the tax return depends. For the period of time it was your primary residence or 2nd home, interest and taxes are claimed on SCH A. For the period of time it was a rental, those are deducted on SCH E.
It's important to work through the program the way it's designed and intended to be used also. That way, the program will do all the pro-rating and splitting between the SCH E and A for you, on "just about" everything. In particular, the mortgage interest and property taxes.
After dealing with the rental section and moving on, when you get to the "your home" section I just can't stress how important it is to pay attention to detail on that screen. If you don't, then I can practically guarantee that you will unwittingly "double dip" on the mortgage interest by claiming it twice. So be careful and ask questions if you're not sure.  
It's apparent (to me anyway) that this is your first time dealing with rental property. In the answer box below is important information  you will find useful and helpful, which will mainly help you avoid making mistakes in the program that will confuse you and make your tax return wrong.
Carl
Level 15

I'm closing a house as my primary residence, but it's rented until end of March. I will have to live on rental myself until the property is vacant. Anything to consider?

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER  you moved out.
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 POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that 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 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.

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 classified as cleaning/maintenance costs. They are instead classified as startup costs, amortized as such and depreciated over time.

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 classified as startup costs, amortized as such and depreciated over time.

Startup Costs

Please note that if residential rental income is not your PRIMARY business, and your PRIMARY source of income, then your rental business is considered to be passive, and you flat out, no way, no how , are not allowed to deduct your startup costs. Period. The IRS says so. See https://www.irs.gov/pub/irs-drop/rr-99-23.pdf and please take note that rental property produces “passive” income, while other types of businesses produce “active” income. Your rental property is not classified as your “active” business, unless you are a real estate professional, an active participant in the management of the property, and it provides a substantial (more than half) amount of your taxable income for the year. All three requirements must be met. There are no exceptions

Start up costs are expenses incurred while preparing the property for rent, with the express purpose being to prepare it for rent, before it is available for rent. These costs do include repair, cleaning and non-recurring maintenance cost. It does NOT include property improvements. With a normal business that produces active income (rental income is passive) you would amortize these costs over 15 years. But you can’t do that with a rental property. However, you can deduct a maximum of $5000 in startup costs in the first year the rental is available for rent, PROVIDED your total startup costs do not exeed $50,000. This is reported on line 18, “Other Expenses” of SCH E, and should be labeled “start up expenses”.

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.


Unlock tailored help options in your account.

message box icon

Get more help

Ask questions and learn more about your taxes and finances.

Post your Question