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Expense deduction / Depreciation schedule for multifamily building

I have a 3 family building whose occupancy was as follows for 2018.  How should I prorate the expense deductions and depreciation schedule?

 

Unit #1 Available for rent January 1.  Rented on April 20th.

 

Unit #2 Available for rent January 1.  Gave up trying to rent it May 2018.  I took over residence of the unit on December 1, 2018.

 

Unit #3 Available for rentJanuary 1. Gave up trying to rent it May 2018.  Started gut renovation on unit sometime in October 2018.

 

The units are all somewhat old and need a lot of TLC.  That's why they were difficult to rent to credit-worthy tenants.

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1 Best answer

Accepted Solutions
MarilynG1
Employee Tax Expert

Expense deduction / Depreciation schedule for multifamily building

Are you preparing a 2018 return?  In the Rental Section, under Property Profile and Assets/Depreciation, you should have three rental properties set up.  

 

For Unit 1, Indicate that it was 'rented all year'.

 

For Unit 2, indicate that you 'converted it to personal use' in May.

 

For Unit 3, indicate that you 'converted it to personal use' in October. 

 

You can enter the full year expenses and TurboTax will calculate the appropriate % for the time the unit was available for rent (for depreciation also).

 

Any Capital Improvements can be depreciated, if you decide to rent the property again later.  Add the cost as a Rental Asset for that unit.

 

Click this link for more info on Capital Improvements and Depreciation. 

 

 

 

 

 

 

 

 

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3 Replies
Carl
Level 15

Expense deduction / Depreciation schedule for multifamily building

The "days rented" count starts on the first day a renter "could" have moved in. So looks to me like everything was rented the entire year. Vacant periods count for days rented, provided you did not live in the property as your primary residence, 2nd home, vacation home, or any other "personal use" pleasure. That means your days of personal use will be a big fat ZERO. More clarity 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 PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

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.

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.

 

MarilynG1
Employee Tax Expert

Expense deduction / Depreciation schedule for multifamily building

Are you preparing a 2018 return?  In the Rental Section, under Property Profile and Assets/Depreciation, you should have three rental properties set up.  

 

For Unit 1, Indicate that it was 'rented all year'.

 

For Unit 2, indicate that you 'converted it to personal use' in May.

 

For Unit 3, indicate that you 'converted it to personal use' in October. 

 

You can enter the full year expenses and TurboTax will calculate the appropriate % for the time the unit was available for rent (for depreciation also).

 

Any Capital Improvements can be depreciated, if you decide to rent the property again later.  Add the cost as a Rental Asset for that unit.

 

Click this link for more info on Capital Improvements and Depreciation. 

 

 

 

 

 

 

 

 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

Expense deduction / Depreciation schedule for multifamily building

I like the idea of creating 3 rental properties.

 

But does that mean I will have to split every expense item across the 3 rental units?  Depreciation, Taxes, Interest, Utilities, common area repairs?

 

Is there an advantage to doing that split vs. bucketing the entire multi-family into unit?

 

For example, If I take Carl's recommendation and say all 3 units were available for rent the entire year with the exception of the 1-month i took residence, I can say the deductible percentage of total expenses is 1- (1/36) = 97.23%.  TurboTax has a field that lets you input the "available for rent" % for the year and then allocates expenses appropriately on Schedule E.  All I need to do then is enter all my expenses for the entire building.

 

Thanks.

 

 

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