Rental to Primary Residence

[jbowers53]

Our situation.

We bought our house (house A) in 1997 and used it as our primary residence until 2008 when we needed and bought a larger house (house B). However 2008 is when the housing market crashed and we did not sell house A but converted it to a rental. Our primary residence was house B and reported depreciation, etc. for house A on Sch E. So far so good.

We since retired and needed to downsize, so we told our tenets that they would have to move by Feb 1, 2023. For tax purposes I intend to use this date to convert house A to personal use. From Feb. 1 to July 31, 2023, house A was unoccupied as improvements were being made (remodeled kitchen, bath, floors, electrical service upgrade, replaced attic insulation, replaced old fence). These improvements will be added to the basis when we eventually sell the house. There was no intention to make the house available as a rental.

On Aug. 1, 2023, we moved back into house A and made it our primary residence. We still own house B as we work to get it ready to put on the market in 2024. 

Based on my understanding, we will claim house A as a rental for the month of January (31 days) only with no depreciation after that. Mortgage interest, insurance premiums, and property taxes will be 1/12 of the total for the year and reported on Sch E. 11/12 of these items will be reported as Itemized Deductions on Sch A since house A was for personal use (although technically unoccupied while work was going on).

Do I have this right so far?

We also still own house B. It was our primary residence January through July when we moved into house A on Aug 1. House B has been unoccupied since Aug 1 as we clear it out and get it ready to be put on the market. We report mortgage interest, insurance premiums, and property taxes as we normally would on Sch A.

Does it matter whether or not a house was the primary residence as long as it was for personal use?

Do I enter the mortgage interest, insurance premiums, and property taxes in TT for both houses separately similar to a refinancing situation where there may be two mortgages to report for the same house, or does TT have a way to identify separate houses since I will be reporting partial sums (11/12) for house A. Will this cause a red flag at the IRS?

Am I missing anything? Are there any peculiarities in TT that may hinder or facilitate entering information correctly?

Any improvements and additions to the basis for house A, as well as recapturing depreciation during the rental years will not affect 2023 taxes but will only come into play when house A is sold in the future. Correct?

I hope I have all this right, probably making it more complicated than it really is.

Thanks in advance.

[AmeliesUncle]

It sounds like you have it all correct.

The only real comment that I have is that whenever you sell House A, the $250,000/$500,000 Principal Residence Exclusion gets a bit funky because you rented it out and then moved back into it.  The exclusion will be prorated, based on the time it was your Principal Residence compared to your total ownership time.    But you won't need to deal with that until you sell House A.

[KrisD15 · Accepted solution]

Yes.

No expense for repairs done after January 31st may be claimed for house A.

As long as the interest you are claiming is interest on loans "secured by the home" and "used to buy, build, or improve THAT home", you can claim the total amount for both houses. (within a loan limit of usually  $750,000)

Once Home A was no longer a rental, the interest would be included as "Home Mortgage Interest" and reported on Schedule A if you are able to itemize.  Same with Property tax. Homeowner's insurance is only deductible for a rental. 

The TurboTax interview for mortgage interest is very confusing, please take your time, read the questions twice and answer carefully. 

Correct, Depreciation Recapture is addressed when the House A is sold.

Improvements are only those things that add value to property, not anything that brings it to its original value. 

The sale of House B should qualify for exclusion of capital gains if it satisfies those requirements.  

Converting Rental 

Home Mortgage Interest 

Sale of your home 

[jbowers53]

I am trying to determine the number of days of what constitutes personal use after the rental is converted to personal use. House A was used as a rental for the 31 days in January. From Feb 1 through to July 31 (181 days) the house underwent renovations and was unoccupied. We moved into the house on Aug 1 (153 days). 

In TT help:

"Not treated as personal use days:

- Days used full-time for repairs and maintenance"

"In the year you convert your property from a rental to personal use, the days you lived in the home as your primary residence after the conversion do NOT count as personal use days."

These two statements seem to imply that no days after the conversion are personal use days.  But TT also says when explaining personal use:

"This means any day, whole or in part, your property was used by:

- You for personal purposes"

I am confused! Is not renovation and remodeling after the tenets move out for personal use? I am inclined to think that the time between when the tenets moved out and we moved in count as personal use. Please help me understand what should be entered into TT. Thanks.

[AmeliesUncle · Accepted solution]

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@jbowers53 wrote:

"In the year you convert your property from a rental to personal use, the days you lived in the home as your primary residence after the conversion do NOT count as personal use days."

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This is what applies to you.  Enter ZERO personal days.  The other statement is referring to situations where it goes back-and-forth between rental and personal use.  But completely converting it to personal use (expected to be for a year or more) means you enter zero personal days.

You will need to MANUALLY prorate some of the expense for the year (such as mortgage interest, real estate, tax, etc.) because it was only a rental for part of the year.