Rental property used as primary residence for partial year, then remodelled, rent out again

[xzll]

Hi, everyone, here is my situation:

I sold my original primary home in Oct 2021 and moved into my rental property, and change it as my primary residence (address, insurance, tax return) while I am looking for my next primary home. I stayed there until Sep 2022 and moved in my newly purchased primary home. Then I start the remodeling work( cost 20K) because I want to rent it out again. Found the tenant and 1-year rental contract starts on 12/1/2022. Now here are my questions on the tax return:

1. Can that 20K remodel cost all reported as rental property cost in year of 2022?

2. From early Sep (when I moved out) until 11/30, while the house is empty and am doing remodeling and finding new tenant, should this period count as personal use or rental use?

3. What about the mortgage interest,property tax, HOA paid to this house. Should I split it myself and report the 1/4 of each as rental cost (roughly counting the last 4 months as rental usage)

Thanks for whoever can help me figure out all these.

[AmyC]

1. No, the house was not available for rent. This remodel cost will be added to the basis of the house. See where IRS Pub 527 for Rental Property states:

Pre-rental expenses. You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent.

2. It is personal use until available to move in and rent.

3. IRS uses available to be rented as the defining point. When was the house remodeled and ready for a renter to move in? That portion of the expenses will be business use. The house was probably ready sometime in November since the renter moved in Dec 1. The remainder would be personal use and the mortgage interest and property tax can go to Sch A. The business use to sch E.

[xzll]

Thanks so much for the response. Further questions from your answer:

1. Do I do anything in the turbotax to add that remodel cost somewhere in yr 2022's return? Or I just archived it myself for future use?

3. for the part goes to schedule A, since I also pay property tax and mortgage interest to my new home in 2022, so I just add this rental property's personal use part on top of it?

Thanks again!

[Carl]

You will need some forms from your 2021 tax return to enter correct information on your 2022 return.

From the 2021 return you need the two form 4562's that print in landscape format. One is titled "Depreciation and Amortization Report" and the other is "Alternative Minimum Tax Report". Most likely, you'll only use the first one. But have both in case the program asks you anything about AMT taxes.

The next form you will need from the 2021 tax return is IRS Form 8582-Passive Activity Loss Limitations. This form shows your passive activity losses. If this form is not present, that just means you don't have any PAL carry overs. This is becoming more common with the tax law changes of 2018.

When you enter the property in TurboTax 2022 your in service date will be the first day a renter "could" have moved in. Note that you will have to adjust your cost basis to account for both the depreciation you took in the past when it was a rental, as well as the property improvements you did while it was your primary residence in 2021-2022.

First, get the total depreciation already taken on the property in the past. To do that, look at the 4562 titled "Depreciation and Amortization Report".  For each asset listed add together the amounts in the "prior eyars deprec" column and the "current year deprec" column. That will be the total of all depreciation taken since you owned the property, for the prior period when it was classified as a rental.

Now add together the amounts in the "Cost (net of land)" column and the "land" column. That is your total cost basis on the property.

Next, you need the total of all property improvements you did on the property. Using these numbers you'll get your "adjusted" cost basis to use for deprecation which will start with the 2022 tax return. The math is:

Original cost basis, minus total of all depreciation already taken, plus the cost of any property improvements you did.  This will be your new "adjusted" cost basis.

Depreciation starts over from year one using the new adjusted cost basis.  When entering the data in the TTX 2022 program, the cost of the land will not change.

COST: the "adjusted cost basis" as described above

COST OF LAND: the same amount in the "land" column of the 2022 from 4562.

Now, depreciation starts over from year one using the adjusted cost basis.

You will still need to keep the paperwork from the 2021 tax return, as when you sell the property in the future you are required to recapture all depreciation taken in the year you sell it. It also needs to be accounted for if you die. So one way or another, if you don't need it, whoever handles your affairs after you die, will need it.