TurboTax

File with experts
File your taxes
Experts at your fingertips

An expert helps with your taxes, or does them for you
TurboTax Expert Full Service

TurboTax Expert Assist

TurboTax Self-Employed
Prior year taxes
File myself
File myself
Do it yourself

We'll guide you step-by-step
TurboTax Do It Yourself

TurboTax Self-Employed

TurboTax Desktop
TurboTax Free

Activate your product

Prior year taxes
Business
Business
Business taxes

Get your T2 corporate return done right, your way
TurboTax Business

TurboTax Business Desktop
Tax situations
Tax situations
Tax situations

Find extra guidance for your big life moves
For investors

For 25 and younger

For self-employed

For new to Canada

For life changes
Resources
Resources
Resources

Explore tax tools, get tips, and read reviews
Personal income tax calculator

RRSP savings calculator

Learning hub

TurboTax support (FAQ)

TurboTax community
Pricing

Level 2

Question

Owner Occupied Property ad Depreciation

Forum|Forum|5 years ago
April 1, 2021
17 replies
137 views

Hello

I bought a two family home 13 years ago 50/50 with in-law. Over a year ago a bought out his part of ownership and refinanced to pay him his share. I started renting the other apartment in the home sometime last year. I need to know how do I calculate the depreciation? Is it based on original cost basis and closing costs and starting from the time of rental (last year) for 27.5 years or based on the refinanced amount when I owned full ownership last year or so for the next 27.5 years?

DaveF1006

Level 15

It depends. To clarify before I answer, what date was the buyout? Was it in 2020 or 2019?

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

desanto05Author

Level 2

late 2019 , could not rent till a few months after

Carl

Level 11

bought a two family home 13 years ago 50/50 with in-law.

So what was rented out after the two of you purchased this property? One unit? Both Units?

Did either of you live in one of the units as your primary residence during the time you owned it together?
How did you each report rental income/expenses (assuming all or part was rented out) when you both owned it? A 1065 partnership return? Or did you each report your 50% on the SCH E of your personal tax returns?

Over a year ago a bought out his part of ownership and refinanced to pay him his share.

What year would that be? 2019? 2018? "Over a year ago" only tells me that it was some year prior to 2020.

I started renting the other apartment in the home sometime last year.

What was/is the status of both units? Is the "other" unit also a rental, and has always been a rental?

I need to know how do I calculate the depreciation?

With Turbotax, *you* don't figure the depreciation. The program does that "for you", depending on how you enter the data. But how you will enter the data, depends on how the "partnership" was dealt with before you bought out the partner of this endeavor.

Is it based on original cost basis and closing costs and starting from the time of rental (last year) for 27.5 years or based on the refinanced amount when I owned full ownership last year or so for the next 27.5 years?

Again, it depends on how things were treated and reported historically, as to "exactly" how you will deal with it going forward. Please feel free to provide a detailed history and we'll be happy to help you get this going.

Typically, the first year of dealing with rental property, or the first year of dealing with a change, can be the most challenging year. But absolute perfection in that first year is not an option. It's a must. Even the tiniest of mistakes will grow exponentially over time. Then when that mistake is caught later down the road (by you or the IRS) the cost of fixing it *will* be high.

So please, provide details of your history with this property, and I'll be happy to try and help. Also note that with the filing deadline approaching, you have absolutely no time to waste. You flat out can not afford to sacrifice accuracy for speed.

desanto05Author

Level 2

We bought the two family home as

co-owners 50/50 in 2006. We both lived in the same property for 13 years paying the mortgage and everything else half and half. When we file taxes every year we claimed everything down the middle 50/50. Owner occupied for both of us. In 2019 I bought his share by refinancing it based on the appraised value. As of 2019 I own the home entirely. I was able to rent the unit upstairs in April 2020 and I’m still living in the property (unit first floor (owner occupied).

Carl

Level 11

Got it. So nothing was a rental until you become the sole owner of the property. That actually makes things much simpler than what I was expecting.

In 2019 I bought his share by refinancing it based on the appraised value.

So basically, you did two things in one fell swoop (in a weird kinda sense).

1. You refinanced your half

2. You purchased his half.

As of 2019 I own the home entirely.

So that means that, on your 2019 tax return you got to report 100% of the mortgage interest *on the new loan only* on your tax return. You also got to deduct the financing fees on the new loan entirely. So you won't have any such fees to amortize on the new loan for the 2020 tax return.

I was able to rent the unit upstairs in April 2020 and I’m still living in the property (unit first floor (owner occupied).

There are several ways to do this. I'm going to recommend the 50/50 split manually, between your primary residence unit, and the rental unit. I'm also assuming that each unit has it's utilities metered and billed separately (water, electric, cable, etc.)

I suggest you treat the rental unit "as if" it was a physically separate unit, that includes one half of the land. Therefore you report that as a single family unit on the SCH E. You'll claim 1/2 of the mortgage interest, property taxes and property insurance on the SCH E as a rental expense. If utilities are biled separately then there is no splitting of utilities. Otherwise if utilities are not billed separately then you only claim 1/2 of the utility expenses on the SCH E.

Now understand this on splitting the utilities and property insurance.

You can only split utility expenses that are truly shared. For example, if there is only one telephone line into the property, you can not split that. (The IRS addresses hard wired telephone lines specifically in their examples.) If you have cable (TV and/or Internet) and it's not shared with the tenant, then you can't split that.

As for the property insurance, you can't deduct property insurance as a SCH A deduction. The insurance you pay for your personal residence, 2nd home or other "personal use" property is just flat out not deductible anywhere on your tax return at all. So you have to pro-rate that and can only deduct on the SCH E, that portion of the insurance that applies to the rental portion. Another thing about property insurance too, and this is important.

If the insurance policy you have is a "homeowners policy", double check it. Typically a homeowners policy does not protect you when you are using the property for "other" than it's insured purpose. So check with your insurance agent to see if you need to purchase a separate "rental dwelling policy" for the rental portion. This will help in several ways.

1. Your "homeowners policy" will protect your unit and your personal belongings in that unit.

2. A "rental dwelling policy" typically only protects the structure and does "not" protect the belongings of the tenant, thus making such a policy cheaper. A rental dwelling policy will include at a minimum, $300K of liability and will pay up to 80% of "lost rents" for anywhere from 6 months to 12 months, should the property become uninhabitable due to fire or other disaster.

3. As for your tenant, I always inform my tenant that they may want to buy a "renters insurance policy", which can be had for less than $200/year. Such a policy will protect the tenant's property so they're not left completely destitute should the rental dwelling they are paying rent for burns to the ground or get destroyed by other disaster, with everything they own in it.

As for the split between SCH E and SCH A, this makes your life easier if things change in the future. For example, if you mvoe out of your unit and decide to rent it out, you just add it to the SCH E as a completely new rental property. If you decide to sell one unit, it doesn't matter which one, reporting the sale is simpler. Though I doubt you'd sell only one unit, when they are arrainged in a upstairs/downstairs configuration. But you never know!