New Primary Home Purchase with Renters for the first few months

[spuriouscardigan]

I would like to know how to handle this scenario in Turbo Tax.

We bought a new house in 2022 to serve as our primary residence. The house was being rented out by the sellers and the lease ran out 7 weeks after closing. We were given the part month rent and the security deposit at closing.

We collected rent for the final month and returned the full security deposit after the lease was over (they were really good tenants!).

I entered the rent collected as income from the rental property but then it seems like quite a bit is being  depreciated for the less than 2 months of renting. Also, doesn't this run afoul of not renting a primary home occupied for less than 12 months?

Thanks!

[DaveF1006]

Yes, I think you may have made an incorrect entry somewhere in your program if you feel the deprecation taken was excessive. it should be very small.  Check your entries and make sure the service date that the rental was placed in service is the date you took ownership of the house and made the contractual agreement with the seller. 

Meanwhile to give you a rough outline on how deprecation should work, i will offer this an example.  Say if the cost basis of the house is $500,000 and if you rented for two months or 1/6 of a year. The depreciation would be determine by the following calculation.  ($500,000)/(27.5) X 1/6 = $3030. This is a rough estimate because it  depends on if you are using a MM convention, HY, or mid-quarter depending on when the property is placed in service. This doesn't matter so much though as the depreciation may differ by a few bucks but doesn't make a dramatic impact.

[spuriouscardigan]

Thank you @DaveF1006  for the quick response!

Just want to clarify that this was a rent-back agreement where we honored the pre-existing rental for 50 days.

After reading the following IRS publication, I don't think rent-back agreement's qualify for depreciation.

https://www.irs.gov/taxtopics/tc704

I also looked at this thread and probably will treat it as a cost-basis adjustment (kick the can down the road to when I sell the place).

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/rent-back-post-settle...

[DaveF1006]

I mentioned overall depreciation in relation to the cost basis of the house, without regard to a rent-back agreement.  Meanwhile for the rent collected for the month, I would report this as income and not an adjustment to the cost basis. 

[Carl]

Just want to clarify that this was a rent-back agreement

Assuming this was addressed in the sales contract/closing documents, you really don't need to report this on SCH E.  Otherwise, you have to keep track of the depreciation for so long as you own the property, and account for it when you sell the property. To much a PITA really.

What I've seen in sales contracts in the past is the words "lease-back", not rent-back. I find it easier and simpler to just reduce your cost basis by the amount of rent received in the lease-back, and be done with it. That way, you have no worries or concerns with tracking and recapturing depreciation years later when you sell the property.