We moved out of our primary residence and listed it for sale in June (we purchased a new home and moved in there). The house was listed for sale and vacant for 3 months. It was converted to a rental in October. I know I can deduct mortgage interest, repairs etc. as rental expenses from October to December. However, is the home considered a vacant rental or a second home for the period of June to October? If considered a second home, I assume I can personally deduct the mortgage interest for those 3 months?
Until it was listed for rent it would be considered a second home.
For tax years prior to 2018, you can write off 100 percent of the interest you pay on up to $1.1 million of debt secured by your first and second homes and used to acquire or improve the properties. (That's a total of $1.1 million of debt, not $1.1 million on each home.) Beginning in 2018, the limit is reduced to $750,000 of debt secured by your first and second home for binding contracts or loans originated after December 16, 2017. For loans prior to this date, the limit is $1 million ($1.1 million without the $100,000 home equity portion). You can also deduct property taxes on your second home and, unlike the mortgage interest rule, you can deduct property taxes paid on any number of homes you own. however, beginning in 2018, the total of all state and local taxes deducted, including property taxes, is limited to $10,000 per tax return.
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Attention to detail by the reader (such as me) is extremely important here.
We moved out of our primary residence and listed it for sale in June (we purchased a new home and moved in there). The house was listed for sale and vacant for 3 months. It was converted to a rental in October. I know I can deduct mortgage interest, repairs etc. as rental expenses from October to December. However, is the home considered a vacant rental or a second home for the period of June to October?
I am assuming three things:
1) You are referring to tax year 2019
2) You did *not* sell the property
3) You had a renter in the property before Dec 31, 2019.
If all three things are not correct, let me know because it matters.
Therefore, it was a 2nd home until Sept 31, 2019. On Oct 1 2019 it was converted to a rental.
Now the date of conversion and the "in service" date do not necessarily have to be the same. The in service date is the date that depreciation starts. That in service date is the first day a renter "COULD" have moved in. Doesn't matter if it took you 2 months to get it rented out after that date either. But it *does* *matter* if you did not have it rented out prior to the end of the tax year. In such a case, you'll have issues with the program which when they arise, I can assist you with. The issue is caused by a programming limitation and if you experience it, I can help you work around it.
Additionally, there are a number of things that the program does not provide the necessary clarity for and without that clarity you'll answer questions wrong and make incorrect selections. So the clarity is provided below.
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 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 deductible.
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.