Loan Cost--Partial Rental Converted to Full Rental

[stellarun21]

One of the rentals was purchased back in Feb 2014 and only 70% of space was rented out from the year of purchase to the end of 2018.  During those years, only 70% of deduction of real estate, insurance, depreciation, amortization, and etc was taken.

Starting on 1/1/2019, the rental was converted to full 100% rental. I added three new assets including 30% of land, 30% building, and 30% of loan cost and placed them in service on 1/1/2019 without thinking too much. The original loan is a 30-year loan. 

Am I wrong on putting whole $5,222( 30% loan cost) in service on 1/1/2019 and depreciating it over 30 years because technically 30% of property is for personal purpose from 2014-2018? As of 12/31/2020, I already deduct 348 of amortization in 2019 & 2020 related to 30% loan cost. Folks, do you think I should have put only 5,222/360*(360-59)=4,366 in service on 1/1/2019 and depreciate over 301 months instead of 30 years? There are 59 months from Feb 2014-Dec 2018. How do I fix? 

The rental was refinanced in 2021 with a different lender. I will deduct unamortized loan cost on 2021 return. 

I don't want to take too much unamortized loan cost deduction on 2021 if I did make mistake on loan cost placed in service in 2019.  Your help is greatly appreciated!!  

[GeorgeM777]

For now, we will focus on the point in time when you converted the remaining 30% of the home to a rental property.  On that date, your tax basis in the remaining 30% of the converted personal residence was the lesser of: (1) the property’s normal tax basis on the conversion date or (2) the property’s FMV on that date.  The property’s normal basis usually equals the original purchase price plus the cost of improvements. 

On the day of conversion let's say the FMV of the property was less than its tax basis.   Then, for depreciation the FMV would become the basis and you would depreciate the basis allocable to the home — not the land — over 27.5 years using the straight-line method.

Regarding the loan, whether it is a mortgage or some other type of loan, such loan would just be part of the expenses you have in operating the property.  You would not depreciate the loan.  The way to handle the loan before you converted the entire property was to allocate 70% of the loan payments to the rental property as an expense.  Now, because the entire property is a rental, you can allocate the entire loan as an expense in operating the rental.  

@stellarun21

[stellarun21]

Thanks George! I understand the basis of property. For loan cost, it was my mistake on the wording. Correct, I don't depreciate loan. I should amortize the loan cost over the life of loan right? My issue is the property was purchased back in 2014 by financing. 70% of loan cost was placed in service in the year of purchase and amortized over 30 years. When the property was converted to full rental in 2019, do I still amortize 30% of loan cost over 30 years?  

[Carl]

Starting on 1/1/2019, the rental was converted to full 100% rental. I added three new assets including 30% of land, 30% building, and 30% of loan cost and placed them in service on 1/1/2019 without thinking too much. The original loan is a 30-year loan.

If I'm understanding correctly, then it sounds like you converted the remaining 30% correctly. But for the amortized loan costs on that 30%, they should be set up to be deducted over the 'remaining" life of the loan, which would be 25 years. If you didn't do that, then leave well enough alone, and keep reading, as it's going to "work out in the wash" anyway.

The rental was refinanced in 2021 with a different lender. I will deduct unamortized loan cost on 2021 return.

Your terminology is unclear and I suspect you're just using the wrong terminology. I think what you mean is "I will deduct remaining amortized loan cost on 2021 return".  If I'm understanding correctly, then I agree. But I'm going to re-state in my way, to confirm and ensure we're on the same page.

Since you refinanced with a different lender in 2021, any and all remaining amortized loan costs to be deducted on the old loan, are now fully deductible in the year you refinanced. Here's how to do that in TurboTax, assuming you entered them correctly as an amortized asset to begin with.

DEDUCT FINANCING FEES OF OLD LOAN WHEN REFINANCING

In the Assets/Depreciation section for that rental property, elect to edit/update the entry for your amortized loan costs (sometimes referred to as points, or origination fees).

- On the "Review Information" screen click Continue.

- On the "Did you stop using this asset 2021?" screen, click YES.

- On the "Disposition Information" screen, in the disposition date box enter the date you closed on the new loan. Then click Continue.

 - On the "Special Handling Required?" screen, click YES.

- On the "Depreciation Deduction Amount" screen, select Transfer These Fees For Me To Other Expenses. Then click Continue.

You'll see the remaining fees of the old loan to be deducted in the Rental Expenses section, very last screen of that section. The entry will start with "Unrealized Refinancing Fees...."

[stellarun21]

Thanks all!