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danijo07
New Member

We haven't lived in our primary residence for over three years, and began renting it out in July. Is that considered a conversion from personal to rental?

My wife and I have lived and worked abroad since December 2013. That is when we fully moved out of our primary residence. Since then, it was unoccupied. We did list it for sale for several months during that time. In July 2016 we began renting the property. Is this considered a conversion of the property, even though we haven't lived there at all since 2013?
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5 Replies
Carl
Level 15

We haven't lived in our primary residence for over three years, and began renting it out in July. Is that considered a conversion from personal to rental?

Yes. The property was converted from personal use to residential rental real estate in July. As you work this through the Rentals & Royalties Income (SCH E) section of the program, (and I can not stress this enough) *READ THE SCREENS*. The small print matters - BIG TIME.   Also, do not try to "read between the lines" information that is not there. Take the information and questions *literally*. Otherwise, you will enter incorrect information. I've also provided the below for your information as a first time landlord. I'm sure you'll find it informative, educational and helpful.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence 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 POPERTY 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 classified as cleaning/maintenance costs. They are instead classified as startup costs, amortized as such and depreciated over time.

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 classified as startup costs, amortized as such and depreciated over time.

Startup Costs

Please note that if residential rental income is not your PRIMARY business, and your PRIMARY source of income, then your rental business is considered to be passive, and you flat out, no way, no how , are not allowed to deduct your startup costs. Period. The IRS says so. See https://www.irs.gov/pub/irs-drop/rr-99-23.pdf and please take note that rental property produces “passive” income, while other types of businesses produce “active” income. Your rental property is not classified as your “active” business, unless you are a real estate professional, an active participant in the management of the property, and it provides a substantial (more than half) amount of your taxable income for the year. All three requirements must be met. There are no exceptions

Start up costs are expenses incurred while preparing the property for rent, with the express purpose being to prepare it for rent, before it is available for rent. These costs do include repair, cleaning and non-recurring maintenance cost. It does NOT include property improvements. With a normal business that produces active income (rental income is passive) you would amortize these costs over 15 years. But you can’t do that with a rental property. However, you can deduct a maximum of $5000 in startup costs in the first year the rental is available for rent, PROVIDED your total startup costs do not exeed $50,000. This is reported on line 18, “Other Expenses” of SCH E, and should be labeled “start up expenses”.

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.


We haven't lived in our primary residence for over three years, and began renting it out in July. Is that considered a conversion from personal to rental?

Great Response. We normally rent our primary residence for 6 months while we are abroad. Last year, due to Covid, we rented 277 days.

When I enter property tax into TurboTax, it splits it between business and personal BUT considers the personal portion as RE Taxes for a 'vacation' home. Does it matter? I haven't yet found a way to override it.

Carl
Level 15

We haven't lived in our primary residence for over three years, and began renting it out in July. Is that considered a conversion from personal to rental?

When I enter property tax into TurboTax, it splits it between business and personal BUT considers the personal portion as RE Taxes for a 'vacation' home. Does it matter?

Yes.

I haven't yet found a way to override it.

Override for what purpose? The program is doing things correctly. For a property not rented the whole year, if you have more than 15 days of personal use, (I think it's 14 days) then you have a vacation rental, and the personal use days count against you for what expenses you can deduct on the SCH E. More details in IRS Publication 527 Chapter 5 (page 17) at https://www.irs.gov/pub/irs-pdf/p527.pdf

We haven't lived in our primary residence for over three years, and began renting it out in July. Is that considered a conversion from personal to rental?

…even though it is my principal residence? My other residence is in France, but that’s the vacation home. Normally, I am there 180 days or less … last year was an exception.

We haven't lived in our primary residence for over three years, and began renting it out in July. Is that considered a conversion from personal to rental?

For tax purposes, "vacation home" just means there was both rental and personal use (and the rental period was expected to be less than one year).

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