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russellvegh
Level 1

Rental Property First Year or Ownership

I bought a property in 2019 that was intended to be used as a rental. However, the property was not available for rent the entire year because it needed major renovations. I want to be able to get the tax deductions for interest and taxes paid but I will not get that if I claim it as a business (since there was no income and place wasn't available for rent). Can I claim this as a personal residence this year and then convert it to a rental when i fill out next years taxes? 

3 Replies
Carl
Level 15

Rental Property First Year or Ownership

Can I claim this as a personal residence this year and then convert it to a rental when i fill out next years taxes?

That is exactly how you're supposed to do it, in your specific situation. SO you will not be reporting anything concerning this property on a SCH E at all, on your 2019 taxes. If you have no other rental property, then you won't even file a SCH E at all with your 2019 taxes.

For your 2019 taxes the property is considered a 2nd home. So you're only deductions for that house on your 2019 taxes will be the 1098 Mortgage Interest Statement, and the property taxes paid. That's it.

So you'll enter the 1098 for that in the "Your Home" section under the deductions and credits tab, in the same exact place you will enter the 1098 for your primary residence. When done, you'll have two 1098's entered there. One for your primary residence, and the other for your "2nd home".

For the property taxes I "think" the program only asks once for the SCH A. If that's still true then add the property taxes paid in 2019 together, and enter the total when asked for proeprty taxes paid.

For now, don't worry about your closing costs and other stuff. You can't claim them on the 2019 return anyway. But you will be able to deal with it on the 2020 taxes provided you actually convert the property to a rental in 2020.

Finally, please print the below for next year's taxes. I can guarantee you that you will need it. 100%.

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.
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.

AmyC
Expert Alumni

Rental Property First Year or Ownership

About 95% of people are taking the standard deduction now.  To claim personal interest and property tax, you would need to itemize. You are allowed to claim your primary home mortgage interest and the property tax on both your primary home and secondary home. Many people do live in the home as they renovate so I am not sure if it is a primary residence or secondary for you. 

You can claim it as a personal residence and then convert it, if you were living there.

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russellvegh
Level 1

Rental Property First Year or Ownership

Thank you so much for the detailed and fast response, Carl! Very helpful.  🙂

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