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chelhoover2
Level 2

Primary home converted to rental in '20. I also refid that home in 2020.Do I combine info from both 1098s (before

The home was converted to a rental on December 1st. The prior 11 months it was my primary residence.  I refinanced in the middle of the year. Should I combine information from both the pre and post refinance 1098s and put the combined information in the "expense" section of the rental income property? Or should I put the pre-refinance 1098 into the "deductions
2 Replies
Carl
Level 15

Primary home converted to rental in '20. I also refid that home in 2020.Do I combine info from both 1098s (before

I am assuming you selected the option to let the program do the splits for you. If you did, then enter both 1098's, all property taxes paid and property insurance paid for the entire 2020 tax year in the rental section. I do know for a fact that the program will split the property taxes and mortgage interest between the SCH A for the period of time it was your primary residence, and the SCH E for the period of time it was a rental. However, I'm not sure the program will handle the insurance correctly.

You "may" have to pro-rate the insurance expense on SCH E manually. Basically, property insurance on rental property is a deductible rental expense. Property insurance on your primary residence is not dedutible anywhere on your tax return.

Since you converted on Dec 1 2020, that means that 11/12 of the total property insurance paid in 2020 is a deductible rental expense. 1/12 of the total insurance paid in 2020 is not deductible anywhere on your tax return.

When entering the 1098's in the SCH E section of the program, there's some important details I want to make you aware of.

It is imperative that you enter the 1098 for the old loan first.

When when  you enter the 1098 for the 2nd loan (the new refi) there will be a checkbox on one of the screens that you "MUST" select, that identifies this new loan as a refi. You "must" check that box. Please make sure you do.

 

ratings image
Carl
Level 15

Primary home converted to rental in '20. I also refid that home in 2020.Do I combine info from both 1098s (before

I'm providing you information in a completely separate post here, in case you find it helpful. Most first time land lords do.

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 "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 PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that “better” the property. Basically, they retain or 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 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, 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 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 deductible.

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 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.

 

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