Please read through this entire post first, before you actually do anything.
When converting a part of your primary residence to rental, during the initial entry of your property in the assets/depreciation section, there is one screen that has a question on it with one word in it that changes everything for *your* *specific* and *explicit* situation. You must change that word (in your mind) so that you answer the question correctly. Failure to do this will result in an INCORRECT amount of depreciation being claimed in the year you convert a portion of your primary residence from personal use, to rental property.
Let's work it through.
As you begin entering the property you'll come to a screen, "Do Any of These Situations Apply To This Property?"
- Select 2020 is the first year, then select I rent out part of my home, then select I converted this property from personal use to a rental in 2020. Then continue.
- Read the information on this screen, then continue.
- Select NO, the property was not rented all year. For days rented, the day count starts on the first day a renter "COULD" have moved in. For personal use days enter ***ZERO***. (read the note under that box.) Then continue.
- Select NO, I do not have a home office, and continue. (A home office is not allowed for residential rental property, only for commercial rental property.)
- Select YES, I will enter total amounts and let TurboTax do the math. Then enter the percentage of your total floor space that is exclusive to the renter. Remember this percentage number. You will need it again later. Then continue.
- Select YES, I am active participant, and continue.
- Select NO for the 1099-NEC question about paying more that $600 to any one person, and continue.
- Select to enter rental info myself, and continue.
- Assuming your property is not in a designated area, select None, and continue.
- You're now on the summary screen. Enter the appropriate sections and go ahead and enter your rental income, then your rental expenses. ReAd ThE sMaLl PrInT on each screen, as it *will* apply and save you grief later.
- Now enter the assets/depreciation section and if prompted (you probably will be) answer YES, because you DO have assets that can be depreciated. Then continue.
- For the "$2,500 or less" question, answer no, and continue. (I don't know anyone who can build out a basement for less than $2,500, even if they do the work themselves.)
- Do the "Did you make improvements in 2020?" answer this question NO. Yes, I know you made improvements. But there is a reason you are selecting NO here. YOu will enter your improvements as physically separate assets. If you include the cost of your improvements with this initial entry for your entire property, then your cost basis structure value to land value will be WAY OFF. So answer this question NO, and continue.
- Select rental real estate property, and continue.
- Select residential rental real estate, and continue.
- Enter a description for the property. Something like "Basement Apartment" or whatever you like.
- Enter what you paid in total for your entire residence in the COST box.
- For the COST OF LAND box, enter that portion of the amount in the COST box, that was paid for the land. The program will subtract the COST OF LAND from COST, to determine what you paid for the structure on that land. It does this in the background without bothering you at this point.
- Enter the date you originally purchased the property. Doesn't matter if it was years ago either. Then continue.
Now here's where attention to detail is important. Things can get screwy if you don't pay attention to detail.
- Select purchased new.
- Select "No, I have not always used this item 100% of the time for **THIS** business"
- Select "I used this item for personal purposes before I started using it in **THIS** business"
- Enter the date you started using it in this business. Typically, this will be the first day a renter "could" have moved in, and I am assuming that you did not use that space for personal purposes for one single day after the date you enter.
- Now, the next thing is "Percenage of *TIME* I used this item for this business in 2020". This is the "trick" question. For *your* *specific* *situation* you will NO enter percentage of time. Instead you will enter percenage of "FLOOR SPACE" of your residence that is used in this business. If you recall, you were asked for that earlier and I told you to remember that percentage, because you would need it later. Well... later is "now". 🙂 So enter the percentage of floor space, then continue.
You can review the details on the summary screen, then continue. This puts you back to the "Your Property Assets" screen. At the bottom of that screen you can click the "Add Another Asset" button to enter the property improvements you did. I am expecting those improvements you did to the basement were done exclusively for the renter. Therefore, business use percentage will be 100%. Also, the improvements are classified as "Residental Rental Real Estate" with the cost of the improvements done to the structure entered in the COST box. Your COST OF LAND box value will be ZERO since you did your improvements to the structure itself, and not to the land outside of the structure.
Take note that the value of your labor is "NOT" allowed to be included in your costs for anything.
Finally, if you need assistance with determining how much of what you paid for your residence when you originally purchased it, gets allocated to the land, I can help with that if you need it. But basically, you use your latest property tax bill to find the percentage figure to be used. Under no circumstances will you ever use the values on your property tax bill as actual values anywhere on your tax return.
-
-
-
