Available for Rent but Vacant

[Anonymous]

This is about a whole house for rent. Tenant lived there from Jan 1-31. Then I advertised and attempted to rent out the house, but failed to find another tenant. Thus the house was *available but vacant*. After 7 months, I stopped attempting on Aug 31, and my family moved in for rest of the year (Sep 1-Dec 31).

My understanding is that:

(1). TurboTax box asking *Days rented at FMV* would be 31, because it says *DO NOT count vacant days*.

(2). TurboTax box asking *Personal days* would be 122.

Using IRS method, ratio would be 31/153=20%. I could deduct 20% of expenses.

Using Tax Court method, ratio would be 31/365=8%. I could deduct 8% of expenses.

But what I was HOPING to do was also capture the *available but vacant* days, which is quite a lot.

In total:

Successfully rented at FMV: Jan 1-31=31 days

Available but vacant: Feb 1-Aug 31=212 days

*Total business days*: 31+212=243

The ratio for this *total business days* is 243/365=66%. I SHOULD be getting 66% deduction of expenses.

Per IRS Publication 527: If you HOLD property for rental purposes, you may be able to deduct your ordinary and necessary expenses while the property is VACANT.

But TurboTax doesn't ask for the 243 'total business days.' It only asks for the 31 'days rented at FMV.' I'm losing out on all those *available but vacant* days after Jan 31.

[AnnetteB6]

First, be sure that you indicated on the 'Do Any of these Situations Apply to this Property?' page that you converted the property from rental to personal use during 2019.  

Then, when you enter the rental days, you will not enter any personal use days.  The personal use came after the property was no longer a rental property.  

The IRS method and Tax Court method of allocating expenses does not apply in this situation because you did not use the rental property for personal use.  When you moved in to the house it was no longer a rental property.  You will simply prorate the expenses based on the months of rental use and the months of personal use before you enter them into the rental expense section of your return.  The personal use expenses are either deducted on Schedule A (taxes or mortgage interest for example), or not deducted at all (utilities or insurance for example).

@Anonymous

[Anonymous]

@AnnetteB6

Thanks AnnetteB6. Ah I see, since my personal use spanned the rest of the year to Dec 31, I could use the conversion method. I imagine I cannot use conversion method if my personal use was in the middle of the year.

Quick followup: Before I posted, I searched and read some threads about how TurboTax divides some expenses automatically for you and auto-inserts them into Sch E and Sch A accordingly. But for other expenses, it doesn't auto-divide.

Do you know which expenses it auto-divides and auto-inserts, and which it doesn't? I heard property tax is auto-divided?

[AnnetteB6]

Property tax and mortgage interest are the expenses that would be prorated between Schedule E and Schedule A.  However, since the property was converted, it may or may not do the automatic prorating.  Be sure to pay attention to the messages on the screen because if it does automatically prorate, it will be shown on screen when you go through the Schedule A section to tell you that an amount has been entered from Schedule E.  

@Anonymous

[Carl]

Days rented: The day count starts on the first day a renter "could" have moved in. It ends on the day you converted the property to personal use, provided you did not live in the property for one single day as your primary residence, 2nd home, vacation home or any other "personal pleasure" use.

it says *DO NOT count vacant days*.

That's because in the personal profile section you did not select the option for "I converted this property to personal use in 2019"

Personal use days: This will be "ZERO". It's asking for the number of days you lived in the property for "any" personal use *WHILE IT WAS CLASSIFIED AS A RENTAL*. If you have no personal use days while it was classified as a rental, then you enter ZERO.

Ifyou elect to hvae the program do the splits for you, the program will split the mortgage interest and property taxes "for you" between the SCH E for the time it was a rental, and the SCH A for the time it was "not" a rental.

You will have to prorate the property insurance yourself, as property insurance is not deductible at all for the period of time it was "NOT" a rental.

All other rental expenses you enter are only for the period of time it was classified as a rental. For example, you can claim the utilities, yard care and other maintenance expenses you incurred, up to the date of conversion to personal use, and that's it.

[Anonymous]

@AnnetteB6

@Carl

Thanks AnnetteB6, I will see if the software prompts me about auto-prorating or not.

Thanks Carl,

If I select 'converted to personal in 2019,' then I can count 'available but vacant' days together with the 'actual days rented at FMV'? In my case, that's 243 days (8 months)?

I ask because I'm unsure which date is the 'conversion date.' The last renter moved out on Jan 31; after that it was 'available but vacant' as I advertised in the newspaper until Aug 31. Is my conversion date Jan 31 or Aug 31?

[Carl]

Your conversion "to" a rental is not in question here. With your mention of the last renter moving out on Jan 31 2019, that indicates to me they were in there well before Jan 1 of 2019. Do your "days rented" count starts on Jan 1st 2019.

Your data converted to personal use must be at least the day you started moving in. I like to "play it safe" and make it one day before I started moving in.

For a typical person whose intent is to convert it to personal use once the last renter moves out, the date of conversion to personal use would be one day after the renter moved out. But your intent was to rent it out again, and that didn't work out. So make y our date of conversion the day before you moved in. You could also make it one day after you pulled all advertising for it too, if you want.

Me personally, I'd convert it the day after the last renter moved out because I want to stop depreciation as soon as possible.

As for the advertising, things must be different in  your location. Where I live in FL hardly nobody pays anyone anything to "advertise" their rental property. At most, I might advertise in one of the free "swip-swap" groups on facebook. But for the most part, I just stick a "For Rent" sign in the front yard in the morning, and if it's a weekend I'll have calls coming in by lunchtime. 

Now I have three rentals of which only two are classified as such right now. (Daughter living in one temporarily, after divorce). I will on average go through 7 applicants before I find one I am comfortable with as a tenant, and they are comfortable with me as a landlord. You wouldn't believe some of the scams I've had folks try to pull on me over the 30 plus years I've been a landlord.

[Anonymous]

@Carl

Thanks Carl, very interesting discussion. Indeed the last tenant had lived there for 4 years continuously, and moved out Jan 31, 2019.

It's interesting that I can *choose* the 'conversion to personal' date to be either:

(1). A day after the tenant's move-out date

(2). A day after the stop-advertising date / 'stop being available' date

(3). A day before my move-in date

I'll choose the stop-advertising date (Aug 31), but very interesting that you'd choose Jan 31 to stop depreciation ASAP. I'd think it'd be the OPPOSITE. Wouldn't you want 8 months of depreciation so your deduction is bigger, instead of 1 month?

[Carl]

Wouldn't you want 8 months of depreciation so your deduction is bigger, instead of 1 month?

No. Absolutely not. That's because when you sell the property you are required to recapture all depreciation taken in the year you sell, and pay taxes on that recaptured depreciation. That recaptured depreciation is added to your AGI for that tax year and has the potential to bump you into the next higher tax bracket overall.

Now the max you'll be taxed on recaptured depreciation is 25%. So if you're already in the 24% bracket it wouldn't matter. But if you're in the 12% or 22% tax bracket and the AGI increase would bump you into the next higher bracket, it could matter depending on how much of your AGI falls into that higher tax bracket. .

[Anonymous]

@Carl

Hmm, interesting, gotta think ahead about what's gonna happen when I sell.

BTW, while researching this prorating depreciation issue, I saw your comments in another thread about how the 'assets/depreciation' section will ask me:

'Did you stop using this asset in ___ year'

'Date of disposition'

'Special Handling Required'

I'm not being asked any of those questions. The only screen that affects prorating depreciation is a box to manually enter a % business use in 2019. In my case, I enter 66% because I stopped advertising on Aug 31 and that's my conversion date. That's 8 of 12 months = 66%.

Similarly in the 'expenses' section, for property tax and mortgage, I enter the 'entire amount' of tax and 'entire amount' of mortgage interest for 2019, but the software is NOT auto-prorating. It's not auto-inserting prorated numbers into Sch E or Sch A.

Do you know if 2019 TurboTax was redesigned not to ask those asset questions, and NOT to auto-prorate? If so, do I have to prorate tax and mortgage by hand?

[Carl]

I'm not being asked any of those questions.

There are several possible reasons for that. The one that pops in my head is that on the "Tell us more about this rental asset" screen you did not select the option to indicate you sold, retired, destroyed, disposed of, converted to personal use.....". Therefore, the program has no reason to ask you those questions.

Mortgage Interest and Property taxes are not prorated until after you complete the assets section, provided of course you elected to have the program do that for you.

[Anonymous]

@Carl

Thanks, Carl. I found that screen and selected "I sold, retired, disposed of, converted..."

BTW, under assets/depreciation, I'm using "66% business use in 2019" because 8 months is 66% of 12 months, and conversion date was Sep 1.

The other topic about auto-proration of mortgage and property tax, it's still not auto-prorating. The mortgage and property tax numbers shown on SUMMARY screen are still original numbers. I cannot find where to 'elect' the program to prorate it.