You will have things split between the SCH E for the period of time it was a rental, and the SCH A for the period of time it was your primary residence. It is "IMPORTANT" that you work this through the program the way the program is designed and intended to be used. If you do, then you will deal with the rental stuff first, before you will deal with the personal use time stuff.
When working this through the rental section of the program (and I can't stress this enough) *READ* *THE* *SMALL* *PRINT* on every single screen. It matters, big time. If you do not, then I can guarantee you 100% you will mess things up and not even know it until you get the audit letter from the IRS.
Do I include the mortgage interest received even though I put it in as a personal deduction?
**YOU*** do not receive mortgage interest unless you are a lender of money, and if you did you most certainly would not deduct interest income that you receive. But you do pay mortgage interest that is deductible. Basically, mortgage interest paid for the period of time it was a rental is reported on SCH E, and for the period of time it was your residence is reported as an itemized deduction on SCH A.
If you will work through the program the way it is designed and intended to be used, and read the small print as you go, the program will take care of this stuff "for you".
With 2018 being your first year dealing with this, it's important to realize that perfection on your tax return is not an option; it's a must. Even the tiniest of mistakes will get exponentially bigger over the years and when you catch it years down the road (if the IRS doesn't catch it first) the cost of fixing it will be costly.
Also note that some sections of the program are not completed yet (such as the rental property assets section) so you will "NOT" be able to complete things yet.
Below is some additional clarification on things that in my personal opinion, are not clarified well in the program. So I've provided the needed clarifications here.
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 POPERTY 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.
