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sayhitome
Level 1

Rented out principal residence and in the same tax year 2020, bought another home which I currently occupy as principal residence

Hello Tax Experts,

I really need help for my scenario below:

I was living in a Condo Unit in CA from Jan-August end in 2020. From September 1st 2020 I rented out this condo. I bought another home in CA in July 2020, the previous owner did a rent-back and he stayed in this new home for 28 more days after I purchased it. I moved into the new CA home in August end.

Hope I was clear on my scenario. Now my questions are:

1. Which home do I list as my Principal Residence in 2020, the condo or new home?

2. Do I need to show 28 days rental for new Home as rental Income, although this Rent was pretty less and not the actual fair market value rent?

3. For property taxes, mortgage principal and Interest deductions, Depreciation etc. how do I fill this in Turbotax Desktop for Mac

I am really confused at this point and would highly appreciate your inputs on this.

4 Replies
Mike9241
Level 6

Rented out principal residence and in the same tax year 2020, bought another home which I currently occupy as principal residence

Hope I was clear on my scenario. Now my questions are:

1. Which home do I list as my Principal Residence in 2020, the condo or new home?

the IRS doesn't ask this question. the address on your return should be the current one

2. Do I need to show 28 days rental for new Home as rental Income, although this Rent was pretty less and not the actual fair market value rent?  I wouldn't since this is to defray the interest and other costs you incurred as the owner while the old owner occupied it.  

3. For property taxes, mortgage principal and Interest deductions, Depreciation etc. how do I fill this in Turbotax Desktop for Mac

on your old home you prorate the interest 2/3 for old 1/3 for new or use the actual amount you paid during the first 8 months.  don't know how your property taxes work.  in some places you pay for in 2020 for 2019 which would go on schedule A. in this case you would also prorate the taxes paid for in 2021  for 2020

 

on the other hand taxes paid in 2020 for 2020 would be prorated

 

you need to enter the "cost" of the old house for depreciation purposes on schedule E (excluding land costs)

the cost is the lower of your tax basis or FMV on 9/1/2020 

 

your new home works like your old one. again taxes depend on what year your paid or were charged or credited on the closing statement. interest goes on schedule A.

 

if your average mortgage balance for 2020 wasn't over $750K, all the interest allocated to your residences  should be deductible.    if not you may want to see the IRS publication 936 to calculate the deductible amount.  this limit only applies to your residence nor to rental properties. 

Carl
Level 15

Rented out principal residence and in the same tax year 2020, bought another home which I currently occupy as principal residence

1. Which home do I list as my Principal Residence in 2020, the condo or new home?

The new home that you were living in as your primary residence on Dec 31 of the tax year.

 

2. Do I need to show 28 days rental for new Home as rental Income, although this Rent was pretty less and not the actual fair market value rent?

No. But your cost basis in the new home is reduced by the amount of rent received. That won't matter until one of three things happen in your life. 1) You sell the property. 2) You convert the property to rental or any other type of business use. 3) You die.

3. For property taxes, mortgage principal and Interest deductions, Depreciation etc. how do I fill this in Turbotax Desktop for Mac

If you received a 1098-Mortgage Interest Statement for the new house, all those numbers "should" be on that 1098. Otherwise, it's on the closing documents you received at the closing.

Now you "should" be working through the program the way it's designed and intended to be used. If you do that, then you will deal with the old house first, and the process of converting it to a rental property. If you elect the option to have the program do the splits for you, then for everything on the *OLD* house, the program will split property taxes and mortgage interest between the SCH E for the period of time it was classified as a rental, and SCH A for the period of time it was "personal use" property. (Meaning your primary residence in this case.)

Take note that you will have to manually pro-rate the property insurance. Property insurance is only deductible (the pro-rated amount) for the period of time the property was classified as a rental. Property insurance is *not* deductible at all, for the period of time it was classified as personal use (your primary residence) property.

Then, when you've finished working through everything under the Personal Income tab and get to the Deductions and credits tab, it's important that you *read* *the* *small* *print* on every single screen in the Your Home section. That small print will inform you that it already has the property taxes and mortgage interest on the "OLD" home for the 9 months or so that it was personal use. So you will only be entering data for the "NEW" loan on the new and current primary residence.

Now when it comes to converting property from personal use to rental, there are many aspects that in my personal opinion (and we all know what personal opinions are like.) does not provide the clarity necessary for you to make the correct selections and enter the correct information. Therefore I am providing the below you help with that. Take note that when converting property from personal use to rental, absolute total perfection in that first year is not an option. It's an absolute must! Even the tiniest of mistakes can and will grow exponentially over time. Then when you catch it years down the road (if the IRS doesn't catch it first) the cost of fixing your "tiny" mistake will be high. So attention to detail is everything, and the only dumb question is the one you didn't ask.

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 "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 “better” the property. Basically, they retain or 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 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, 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 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.

sayhitome
Level 1

Rented out principal residence and in the same tax year 2020, bought another home which I currently occupy as principal residence

This is so useful information thanks for sharing detailed information 

sayhitome
Level 1

Rented out principal residence and in the same tax year 2020, bought another home which I currently occupy as principal residence

This is so useful information thanks for sharing detailed information it clarifies almost all doubts I had and will help me in not making mistakes in filing the return really appreciate it 

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