Daddy died in March 2021.
I'm sorry for your loss. Be aware that your mother will still file a joint tax return and will get the full $12,550 standard deduction for 2021. Just make sure the option for "this tax filer passed away" is selected for your father.
My mom needs care and so she continues to live with us. They never lived in the home in 2021
What matters here is intent at the time mom came to live with you. If the intent was that she would never return to the home, the property stopped being her primary residence. Maybe that intent was established when dad passed away? Overall, until things are/were changed, the home remains your mom's primary residence. At the latest, it ceased being her primary residence at the time it was decided to rent the property out.
altho we went down in April for 2-3 weeks and cleaned out their possessions and started doing work to get the house in better shape.
At the earliest, I would treat that as the earliest date it was no longer considered her primary residence, and is the date I would use for tax purposes. But that's me.
My niece is renting the house now and started paying rent July 1st
So at the latest, the house was converted from personal use, to residential rental real estate on the contracted move-in date.
although they lived in the house for several weeks to supervise some of the repairs, etc.
You "may" be able to consider that period to make the conversion date even earlier, provided rent was paid for that time. The issue is, when it comes to repair and maintenance expenses, those incurred in the process of preparing the property for rent for the very first time, are just flat out not deductible, unless the property was actually "available for rent" and basically move-in ready when the expenses were incurred.
I consider it is FMV rent based on the condition of the house and its size.
For the SCH E, depreciation is based on the "Lower" of what was paid for it when originally purchased, or it's FMV on the date of conversion. More than likely since the house was originally purchased by your parents in 1975 or thereabouts, what they paid for it would be the lower amount. However, even that's not final since dad passed in 2021. Your parent's were each 50% ownership of the property. So when dad passed, mom gets a step up in basis to the FMV of dad's 50% on the date of his passing. Any property improvements done before he passed are included in that stepped up basis too.
So we had over 16k in expenses and $11k in income.
Understand that there is a difference between repair/maintenance expenses, and property improvements. An explanation of that later below in this post.
I hate to lose the $6k but of course I want to do this the correct and legal way.
You lose either way. Since the property is owned by your mother, everything concering it gets reported on her tax return; not yours. All rental expeneses and property improvements are reported on her return, regardless of who paid for them. ALl rental income is claimed on her tax return, regardless of who actually received the money.
It appears from Pub. 527 that since there was no personal use by my parents, perhaps that counts.
Counts for what? I'm not clear on that. Be aware there is difference between personal use property, and primary residence. A primary residence is personal use property. But not all personal use property has to be one's primary residence. One can have a 2nd home that is personal use, but not their primary residence.
A concern is that we knew we would have to rent or sell the house but had not really figured out what to do until Daddy died.
At the absolute latest, the property converted from personal use to residential rental real estate on July 1st. At the earliest, (as I see it) on the date of dad's passing.
Another issue I have is whether Mama is considered a resident of SC or VA! I was thinking maybe half year resident of each. If you have any insight into that issue, I would very much appreciate your advice.
Since it has been determined that mom will never be returning to SC, I would suggest she file a part-year residence return for both states, and use the date of your dad's passing as the date her resident state changed.
Now for that explanation of rental stuff I mentioned I'd provide; It's a lot I know. But don't let it overwhelm you by trying to absorb it all in one shot.
RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property Improvement.
Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.
Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.
Expenses for these types of costs 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 need to 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 retain or 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.
There are rules that allow you to just flat-out expense and deduct some property improvements instead of capitalizing and depreciating them, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.
Cleaning & Maintenance
Those expenses incurred to maintain the rental property and its assets in the usable 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 for the very first time are not deductible.
Repair
Those expenses incurred to return the property or its assets to the same usable 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 for the very first time 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.
Rental Property Dates & Numbers That Matter.
Date of Conversion - If this was your primary residence or 2nd home before, then this date is the day AFTER you moved out, or the date you decided to lease the property – whichever is later.
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 was contracted to move in, and/or "could" have moved in. That would be your "in service" date or after if you were asked for that. Vacant periods between renters do not count for actual days rented. Please see IRS Publication927 page 17 at https://www.irs.gov/pub/irs-pdf/p527.pdf#en_US_2020_publink1000219175 Read the “Example” in the third column.
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, 2nd home, or any other personal use reasons after you converted it to a rental. Days you lived in the property for the purpose of preparing it for rent (or for the next renter) do not count as personal use days either.
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.
