Where do I enter rental property depreciation? I c...
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abhishek-gupta-c
Level 2

Where do I enter rental property depreciation? I can not find ant item on the rent info page which is meant for rental property depreciation.

I can not find ant item on the rent info page which is meant for rental property depreciation. None of the "asses/expense" items list it. Also what is the best source to get base price for depreciation
4 Replies
Carl
Level 15

Where do I enter rental property depreciation? I can not find ant item on the rent info page which is meant for rental property depreciation.

You don't "enter" depreciation yourself per-se. The program does it 'for you" based on the information you enter in the assets/depreciation section.

Assets are entered in  the Assets/Depreciation section of the Rental & Royalty Income area of the program.

You only need to actually enter an asset the first year that asset is placed "in service". After that, the program will automatically import the prior year's entry and figure the current tax year's depreciation "for you".

While I get the impression that you are experienced with tax reporting of rental property on a tax return, I suspect this is your first year dealing with it in the TurboTax program. If that's the case, the below information will provide you the clarity needed, that in my opinion the program does not (but should) provide.

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 for any type of personal pleasure use 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, 2nd home, or any other personal use reasons 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.

 

abhishek-gupta-c
Level 2

Where do I enter rental property depreciation? I can not find ant item on the rent info page which is meant for rental property depreciation.

Thanks Carl.

We rented this house in 20 dec 2019, so it was not added as rental income last year, however conversion date was in 2019. Also we spent a lot in material improvement of the home ( With receipts) in 3 years before renting the house. Can we retroactively add those costs ? basically  your answer implies we need to define the asses. But we did not think along these lines until now. 

Carl
Level 15

Where do I enter rental property depreciation? I can not find ant item on the rent info page which is meant for rental property depreciation.

We rented this house in 20 dec 2019, so it was not added as rental income last year, however conversion date was in 2019.

Technically and legally speaking, you should have reported the conversion on the 2019 tax return, and filed your first SCH E for that property with your 2019 return. But looking at how late in the year you got a renter in it, I honestly wouldn't bother amending the 2019 return at this point. I'd just start the SCH E with my 2020 tax return and show a conversion date and in service date of 1/1/2020.

So "technically" you should amend the 2019 tax return. But I'm not going to push you on it. One thing is, you'd have to amend the 2019 tax return before you could even start your 2020 tax return. That's the only way the "correct" data from the 2019 SCH E could be imported into the 2020 tax return. Remember, you can only import when you first start the return. You can't start your return and import later. So if you've already started your 2020 return and decide you're going to amend the 2019 return now, that would mean you'd have to start your 2020 tax return all over from scratch, to import the data from the amended 2019 tax return.

In my opinion, it's worth the risk of an audit to just leave the 2019 tax return alone.

Also we spent a lot in material improvement of the home ( With receipts) in 3 years before renting the house. Can we retroactively add those costs ?

It's not "retroactive" actually. But it is important to understand the difference between a property improvement and other types of "expenses". I've already provided those explanations and definitions in a prior post in this thread, so I won't beat a dead horse.

Your property improvements (defined in prior post) add to your cost basis in the property. Since the property improvements were done before you converted the property to a rental, you can just include those costs in your primary property entry in the Assets/Depreciation section. There's two ways to do it, and I"m going to explain both ways, and why you should "NOT" use one of those two ways.

Method 1: when you initially enter the property in the assets/depreciation section, one of the screens will ask you for the cost of any property improvements you did. DO NOT enter the cost of any property improvements here. Otherwise,the allocation of your cost basis for the property, between the land cost and the structure cost will just flat out be wrong. 

The program will ask you for information from your latest property tax bill. Now the property values on your property tax bill are "tax" values. Your property tax bill does not usually show the Fair Market Value (FMV) or the actual price you paid for any of it.It only shows the "assessed" value of the property for "property tax assessment only". However, the program does use those figures for the sole purpose of determining what percentage of the "actual" price you paid for the property, to allocate to the land.

So if your property tax appraiser has appraised your property to be worth $100,000 with $30,000 of that being the value of the land, that means that 30% of that is for the land, and 70% is for the structure on that land. Therefore, if you actually paid $250,000 for the property, then 30% of that ($70,000) is allocated to the land. The remianing $180,000 is allocated to the structure and that is the amount that gets depreciated over the next 27.5 years. starting from the date the property is placed "in service" as a rental.

So what's the problem with adding your property improvements where the program specifically and explicitely asks for the cost of any property improvements? Using my numbers above, if I added on a family room and an in-ground pool in the back yard at a cost of $100,000, that makes my cost basis in the property $350,000. The program will figure 30% of that for the land, which is "WRONG". When you do a property improvement that is 'NOT" a land improvement, that does not change the value of the land.

Method 2: On the screen where you have "COST" and "COST OF LAND", in the COST box you will enter the price you paid for the property when you originally purchased it. Then you enter the percentage of the COST in the COST OF LAND box that actually applies to the land.

next, you will change the amount in the COST box so that it includes the cost of the property improvements you did after your initial purchase of the property and "before" you placed the property in service as a rental. You will "NOT" change the amount in the COST OF LAND box, no matter what.

 

basically your answer implies we need to define the asses. But we did not think along these lines until now.

If the property improvements were done before you placed the property "in service" as a rental, then you can enter them separately if you want. But there's really no need to. You can just add those improvement costs to the cost of the structure that was improved, and you'll be good. The "bottom line" is going to be the same either way.

The only time you "have" to enter a property improvement separately, is when the "in service" date of that property improvement is different from the "in service" date of the main property asset itself. That's because depreciation does not start on an asset, until the date it is actually placed "in service".

 

 

abhishek-gupta-c
Level 2

Where do I enter rental property depreciation? I can not find ant item on the rent info page which is meant for rental property depreciation.

Thanks @Carl for the great answers. For answers like these I love turbotax 

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