So now I'm on 2019.
Aha! That makes all the difference in the world! After answering your questions, I've also provided "general guidance" below that, for the year of conversion. I assume you are amending your 2019 tax return. For future responses in this thread, please make the first thing you mention "I am using TTX 2019" so as to keep us both on the same page here.
Be aware also that when you amend your 2020 tax return, you will "NOT" be able to import the corrected data from your amended 2019 tax return. So you will have to print out your 2019 tax return to get the figures you will need to manually change yourself during the 2020 tax amendment process.
Using the Desktop version of TurboTax 2019 you have the choice of entering expenses for the entire year and letting the program do the splits for you, or you can elect to do the splits yourself. I suggest you elect to do the splits yourself, because the program is not capable of splitting "everything" correctly, and it's easy to miss the small print on various screens telling you what it can't split.
Basically, the general rental expenses entered are only those expenses incurred during the tax year, after it was converted to a rental. That's things like utilities, repairs, maintenance costs, ect. Costs incurred in the process of preparing the property for rent for that "very first time" are flat out not deductible at all. (Exceptions covered below)
These are the items that need to be pro-rated by you, assuming you elect the option to pro-rate manually yourself.
1. Property taxes paid in 2019 need to be prorated between SCH A for the period of time it was your primary residence, and SCH E for the period of time it was a rental. It does not matter if those property taxes were paid before or after it was converted to a rental. If property taxes were paid in 2019 (and I'm sure they were) then you pro-rate.
2. Mortgage interest paid in 2019 as shown on the 1098-Mortgage Interest Statement are prorated between the SCH A for the period of time it was your residence, and the period of time it was a rental.
3. Property insurance is pro-rated to the SCH E for the period of time it was a rental. Property insurance is "NOT" deductible on the SCH A for the period of time it was your residence. Again, it does not matter if the insurance was paid before or after it was converted to a rental. So long as it was actually paid in 2019, (and I'm sure it was) you can prorate a portion of it to SCH E for the rental.
Now, once you have completed amending the 2019 tax return and are ready to mail it, make sure you also save the amended return in PDF format. From that PDF you need to print out the following, as you will definitely need it for amending the 2020 tax return.
1. IRS Form 4562 that prints in landscape format titled "Depreciation and Amortization Report" for that specific property.
2. IRS Form 4562 that prints in landscape format titled "Alternative Minimum Tax Depreciation Report" for that specific property.
3. IRS Form 8582-Passive Activity Loss Limitations. Note that you may not have this form in your 2019 tax return, as depending on a number of factors it's perfectly possible you wont' have any passive loss limits since the property was converted the last quarter of the tax year.
Now for that "general guidance" I referenced above.
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 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. Whereas fixing a broken handrail on the front step would not qualify as a betterment. It's a repair expense addressed below.
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 it's 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 it's 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 that 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 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.
