What is the correct way to enter rental income on a home you own? Should all rent be included...

[bjmt]

I rented out my primary home for few months in 2022 (50% of 2022) as I traveled. I entered all amounts in schedule E for rent received, mortgage interest, insurance,  repairs, property tax, condo fees and special assessments. Under assets rental property I stated I used the primary residence for business/rental for 50% of 2022 and purchased in 2015. It was rented 100% of the time from 2015- 2020 and then became a primary residence end of 2020 on to 2022 except 6 months in 2022 when it was used as rental again. 

Turbo Tax is not taking into account out all my $ entries under "EXPENSES / ASSETS (DEPRECIATION)" and is showing my net income for the primary residence rental as rent received minus the depreciation. It put a $1 value for my insurance, cleaning/maintenance and mortgage interest totaling $3. It shows real estate taxes and repairs lines as "not started" but when I click on 'start', it shows the amounts I had input.

Why is it zeroing out my real estate taxes and repairs line amounts and assigning $1 value to insurance premium, cleaning/maintenance and mortgage interest lines?

[PatriciaV]

You may need to review your entries under the Property Profile and the rental expense/assets sections. 

Did you report that you converted your home to a rental? In this case, you enter expenses for the time it was used as a rental under the Rental Property section (allocation to personal use is covered later under Deductions & Credits).

Did you report that the property was not rented all year? Did you enter the correct number of days rented? Personal use days for this question are for the months the property was rented (not the time you lived there).

Did you enter the full amount for your rental expenses? Mortgage interest and property taxes entered 100% here are allocated by TurboTax to Your Home under Deductions & Credits.

Did you enter 100% business use for the residential rental asset? TurboTax knows the property was rented only half the year, but the residence should have been used 100% as a rental during those six months. You should enter all prior depreciation taken during the time it was used as a rental in the past (from your personal records).

Correcting these entries may solve your income/expenses calculations.

@bjmt 

[Carl]

A few things need further clarification.

purchased in 2015. It was rented 100% of the time from 2015- 2020

So the property was purchased and immediately placed in service as a rental. You never lived in the property until you converted it to personal use on your 2020 tax return. Or did you convert it to personal use on your 2021 tax return?

After you identify the tax year you converted the property to personal use, you will need some documents from that tax year.

 - Two form 4562's that print in landscape format. One is titled "Depreciation and Amortization Report" and the other is titled "Alternative Minimum Tax Report".

 - IRS Form 8582-Passive Activity Loss Limitations.

then became a primary residence end of 2020 on to 2022 except 6 months in 2022 when it was used as rental again.

What month did you convert the property back to a rental? Did the property remain classified as a rental for the remainder of the tax year and into 2023? Is the property still classified as a rental today in 2023? This matters big time. It also matters what you used as a cost basis for depreciation on the 2022 return, as it will "NOT" be the same cost basis you used originally for the first time it was a rental.

[bjmt]

@PatriciaV

1. Yes I reported I converted home to a rental.

2. Yes, I reported it was not rented all year.

3. Yes, I entered full amount of my expenses in the rental part of "wages and income"

4. For the six months it was rented, it was used 100% rental business. It is using exactly 50% of my annual depreciation. 

I rented the primary residence out for exactly 185 days and lived in it for 180 days which is what I input. It looks like TurboTax has applied 50% of my mortgage interest and 50% of my property taxes under "Deductions and Credits". However, it is not applying 50% of my maintenance, repairs, cleaning expenses to the rental deductions. Instead it is only deducting the 50%annual depreciation from rental income.

Under property profile of rental asset I clicked on "No, I have not always used this item 100% of the time for this business." and "I first used this item at least part of the time for this business, and also used it for personal purposes."

Date I started using it in this business: 10/01/2015

Percentage of time I used this item for this business in 2022 (e.g., 80%): 50

Is this not right?

[bjmt]

@Carl 

Property was converted as primary residence in April 2020. In 2022, property was converted back to a rental in May 2022 and back to a primary residence in Nov 2022.

I looked up the depreciation amounts that was reported in tax years 2015-2019 when it was 100% of the year used as rental, and input that amount in TurboTax where it asked for prior years depreciation. 

In 2022,I rented the primary residence out for exactly 185 days and lived in it for 180 days which is what I input. It looks like TurboTax has applied 50% of my mortgage interest and 50% of my property taxes under "Deductions and Credits". However, it is not applying 50% of my maintenance, repairs, cleaning expenses to the rental deductions. Instead it is only deducting the 50% of the annual depreciation from the rental income.

Under property profile of rental asset I clicked on "No, I have not always used this item 100% of the time for this business." and "I first used this item at least part of the time for this business, and also used it for personal purposes."

Date I started using it in this business: 10/01/2015

Percentage of time I used this item for this business in 2022 (e.g., 80%): 50

Is this not right?

[Carl]

You've made a number of errors here. Most are because you've not been provided the clarity needed, and one because you didn't read the small print. Easy to fix. Just be aware the program can't handle everything correctly, meaning you have to do some things manually yourself. For this, you will need the 4562's from the 2020 return, since that's the last return you reported this property on SCH E. (The year you converted to personal use)

When you convert the property from personal use to rental for a second time, depreciation starts over from year 1, using a new adjusted cost basis that takes into account depreciation taken before this 2nd conversion to a rental.   You have to reduce the cost basis by the total amount of all depreciation taken in the past, then depreciate from year 1 using that new, lower cost basis. Basically, subtract the total depreciation taken in the past, from the original cost basis used in the past. That will be your new cost basis for the 2022 tax return. What you enter in the COST and COST OF LAND boxes matters on the 2022 tax return.

COST: this will be the original cost basis, minus the total of all prior depreciation taken.

COST OF LAND: This will be exactly the same as entered back in 2015, as land is never depreciated.

It's up to you to keep track of the prior depreciation taken before 2022, as you will need to report and recapture it if/when you sell or otherwise dispose of the property in the future. The program has no way to "know" about the depreciation you took between 2015-2020

If the 8582 is present in the 2020 return, you'll need that to claim/show your PAL carry over losses.

When asked, the property was rented "THE WHOLE YEAR".  The program (not you) will figure that first year depreciation based on your "in-service" date.

The property was 100% (ONE HUNDRED PERCENT) business use with ZERO personal use days, and was rented "the whole year". What you used the property for before you converted it to a rental does not count for anything, anywhere on your tax return. 

The program (not you) will prorate only the mortgage interest and property taxes between SCH A for the period of time it was your residence, and SCH E for the period of time it was a rental. You *do not* have to enter anything under the Deductions and Credits tab in the Your Home section for mortgage interest and property taxes. If you'll read the small print on that screen, it will (should) tell you an amount is already account for.

The one and only thing you need to pro-rate is property insurance. A percentage of the property insurance paid in 2022 equal to the percentage of time it was classified as a rental, is deductible on the SCH E. The remainder is not deductible anywhere, as property insurance for the period of time it was your residence is just flat out not deductible at all.

For other rental expenses, you only enter those expenses incurred *AFTER* the property was converted to a rental, and they are 100% deductible on the SCH E. Expenses incurred before the property was converted to a rental are just flat out not deductible at all.

Now if you did any property improvements during the time it was your residence, let me know. Property improvements are not handled the same as other costs and expenses, and it does not matter if the property was your residence or a rental at the time the property improvement was done.

[bjmt]

Thank you @Carl for explaining in detail. I am really surprised that the period used as primary residence from Jan-Apr 2022 and then again Nov-Dec 2022 does not count for anything, anywhere on the tax return and I need to put ZERO personal use days. Once I updated my personal use days from 180 to 0, TurboTax has populated my insurance premium, repairs, cleaning/maintenance amounts in Schedule E accurately whereas previously it was assigning "$1" to each of those line items. Now it has populated these line items with 50% of the expense amounts I entered for each respectively.

The property we are discussing about is a condominium, not a house. Hence, the COST OF LAND should be zero, correct? I am looking at my TurboTax return from 2015 but not able to see the COST that was entered back then. Where can I find it?

I did not have to enter anything in the Deductions and Credit tab. Turbotax calculated 50% of my property tax and mortgage interest and populated it. I had read the small print. I did have a 8582 present in the 2020 return. What number should I use from this form and where?

[Carl]

Now it has populated these line items with 50% of the expense amounts I entered for each respectively.

To clarify, when you have converted to rental (on Oct 1 per your prior post in this thread) and you elect to have the program do the splits for you, the only thing split is mortgage interest and property taxes. That's it.

For all other rental expenses, you only enter those rental expenses incurred after the date of conversion (Oct 1 according to you) and all of those are 100% deductible. That means that you (not the program) will have to manually prorate the property insurance.

Percentage of time I used this item for this business in 2022 (e.g., 80%): 50

That's wrong on two fronts. For starters, if you placed it in service in Oct, that's not 50% of the year. Not even close. Second, it's asking for percentage of time starting from the date you placed it in service. So if you placed it in service on Oct 1 and you never lived in the property as your primary residence, 2nd home, vacation home or any other type of "Personal pleasure" use after Oct 1, then it was used 100% of the time in this business.

The property we are discussing about is a condominium, not a house. Hence, the COST OF LAND should be zero, correct?

Usually. But not necessarily.

I am looking at my TurboTax return from 2015 but not able to see the COST that was entered back then. Where can I find it?

Assuming you saved the 2015 return in PDF format, and that you elected to save everything, look for a form 4562 that prints in landscape format. There's two of them, and you want the one titled "Depreciation and Amortization Report". It will list all assets for that rental including the property itself. Two columns for the property asset are:

Cost (net of land) - This is the value of the structure.

Land: This is the value of the land. If that column is blank for that asset, then there was no part of the cost basis allocated for the land. The specific form I'm referring to is below, with the two columns circled in red.

[bjmt]

Thank you, @Carl .

I think there is a misunderstanding on rented period. Let me clarify again.

Jan, Feb, Apr, March 2022- Primary Residence

May, June, July, August, Sept, Oct 2022- Rental

Nov, Dec 2022- Back to primary Residence
Property was rented for 6 months. This is why the 50% is right for me having used it as primary residence.

I do have my 2015 tax return in PDF. However, I do not see a 4562 for my property in question or cost (net of land). All I have is a Schedule E for it. Was this not done right when I purchased in 2015?

[Carl]

Property was rented for 6 months. This is why the 50% is right for me having used it as primary residence.

Thanks for clarifying that for me. But no, it's not right.  The property was 100% business use **during the time it was classified as a rental**. Now if it was classified as a rental from Jan 1 through Dec 31, then yes, 50% would be right.

I do have my 2015 tax return in PDF. However, I do not see a 4562 for my property in question or cost (net of land). All I have is a Schedule E for it. Was this not done right when I purchased in 2015?

Several Possibilities. First possibility is that when you saved the 2015 return to PDF, you did not select the option to save everything. You only selected the option to save "forms needed for filing" or "forms for your records". With those two options, it's possible the 4562's for the rental property were not included.

Now if you have the "official" 4562 form which prints in the normal portrait format, that confirms you did take depreciation, yet didn't elect the option that saves the other two "unofficial" 4562's that print in landscape format.

Another possibility is, things were not done correctly on the 2015 tax return, or maybe 2015 was not the tax year it was rented? I say this, because if one is confused (which is quite easy) and its the tax return you "prepared" in 2015, then it would be the tax return for 2014 that you prepared in 2015.

Second possibility, is that if the property was not classified as a rental for the entire tax year. For example, you converted it to a rental in say, April of 2015 and converted it back to personal use in say, October of 2015. So the property was not classified as a rental for the entire tax year. In that case, you are not required to depreciate the property then. Therefore, no 4562 would be needed.

To further clarify that, if the rental classification crossed tax years, you'll need to depreciate. For example, you converted it to a rental in Oct 2015 then converted it back to personal use in March 2016. Technically, it was classified as a rental less than a year. However, the classification crossed tax years. Therefore you'd be required to depreciate it, and there would be a 4562 for both 2015 and 2016 tax years.

Now I don't know if a tax transcript from 2015 would be available from the IRS, or if that would even have the details we're looking for. Most likely no. But have you checked? Generally, transcripts are free, whereas an actual copy of the tax return return as filed will cost. But the actually copy filed will "not" have what you're looking for anyway.

https://www.irs.gov/individuals/get-transcript

[bjmt]

The way it has been worded is extremely tricky as it says percentage of time I used this item for this business. Under 'Tell us More about this rental asset' I have clicked the radio buttons for:

• No, I have not always used this item 100% of the time for this business. 
• I first used this item at least part of the time for this business, and also used it for personal purposes.

Date I started using it in this business: 10/1/2015

Percentage of time I used this item for this business in 2022 (e.g., 80%): 100

Updating the 50% to 100% did not change my refund amount or deductions & credit (50% of mortgage interest and property expenses). But it did significantly change my rentals and royalties amount.  The real estate taxes, insurance premiums, repairs, cleaning/maintenance and mortgage interested on Schedule E are still showing all 50% of actual expenses.

Do these changes sound right?

I went back to previous returns in TurboTax. It looks like 2015 tax return is no longer available and you are right that the PDF that I saved is not the full version. I was able to look up the 2016 tax return in TurboTax (which was a lot more detailed than the 2016 PDF tax return PDF version I had downloaded). And the 2016 rerun does show a 4562 with a Cost (Net of Land) amount. I can confirm that I purchased property on 9/2/2015 and started renting on 10/1/2015 (up until May 2020 when it converted to primary residence and then rental again May-Oct 2022). 

[bjmt]

Hi @Carl , just wanted to follow up. Do the below changes sound right to you? When I input the cost (net of land) figure from 2016 , it zeros out depreciation for this year completely. Cost basis for the property itself I followed your guidance and took cost basis back in 2015 minus the accumulated total depreciation taken up until 2019 (the last year it was used as a rental throughout the year).

Please let me know.

[Carl]

Do the below changes sound right to you? When I input the cost (net of land) figure from 2016 , it zeros out depreciation for this year completely. Cost basis for the property itself I followed your guidance and took cost basis back in 2015 minus the accumulated total depreciation taken up until 2019 (the last year it was used as a rental throughout the year).

Please let me know.

I think I need to clarify some things just to ensure we're on the same page. I don't think we are.

Nowhere in the program are you asked to enter "Cost (Net of Land)".  You're presented two boxes in the program. They are:

COST

COST OF LAND

For COST, look at the 2016 form 4562 that prints in landscape format titled "Amortization and Depreciation Report". For the property itself add together the amounts for the property under the "Cost (Net of Land)" column and the "Land" column. That total is what you enter in the program in the COST box.

The amount on the 4562 under the "Land" column is what you enter in the program in the COST OF LAND box.

The amount in the COST OF LAND box must be lower than the amount in the COST box.

Once those figures are entered, the program (not you) will subtract the amount in the COST OF LAND box, from the amount in the COST box, to determine the value of the structure to be depreciated.

Let's see what that result is when you get to the asset summary page.

[bjmt]

Thank you, @Carl .

2016 4562 Form has 0 for "Land". 

In current return, I have entered the 0 for COST OF LAND. For COST, I entered "Cost (Net of Land)" amount from 2016 since "Land" was 0.

Total refund has not changed and depreciation amount applied for this property shows a consistent amount as in prior years when it was a rental full time.

I thought in one of your earlier messages you had said that for COST, I need to take the cost from when I purchased it and reduce it by the cumulative depreciation up until 2019? Or is this not the case and I need to enter COST as original COST and just need to enter the cumulative depreciation used in prior years in the below question:

"Amount of Depreciation Taken in Prior Years (not including any section 179 deduction or first year special depreciation allowance deduction)"

[Carl]

2016 4562 Form has 0 for "Land".

That makes sense then. I assume this is a condo where you don't own the land or any portion of it at all.

Still, the math holds. Cost (net of land) plus Land equals your cost basis. If "land" is zero, then so be it.

I did forget to mention to subtract the prior depreciation taken from the total cost basis. But it looks like you caught that.

Make sure your in service date for the asset is correct, and that your business use percentage is 100%. If there were no personal use days *after* you converted it back to rental, you can state it was rented "the whole year" and the program only considers from the in service date, to Dec 31, 2022.

That should give you a pro-rated amount of depreciation on the asset summary screen now.