topic Do I need to prorate rental expenses and property taxes? in Investors & landlords

Do I need to prorate rental expenses and property taxes?

chuhuangtina — Thu, 18 Mar 2021 17:38:58 GMT

Do I need to prorate rental expenses and property taxes if I only rent out the house for a few months while the rest of the year is vacant?

Re: Do I need to prorate rental expenses and property taxes?

MinhT1 — Thu, 18 Mar 2021 17:54:58 GMT

It depends.

If your rental home was vacant because you found no tenant and your rental was still available for rent, then all rental expenses and property taxes are deductible.

If you took the property off the rental market, then you have to prorate the expenses and property taxes.

Re: Do I need to prorate rental expenses and property taxes?

chuhuangtina — Thu, 18 Mar 2021 19:19:42 GMT

I bought the house in July 2020 and rented out in September 2020. Property taxes and home insurance I paid for was for July2020 to June2021. Mortgage interest I paid for was for July 2020 to December 2020.

1. Can I deduct half of property taxes and home insurance expenses as rental expenses?

2. Can I deduct the full amount of mortgage interest as rental expenses?

3. In general, to claim for property tax deduction for rental expenses or itemized expense, do I count for the months the bill covers or whatever the amount I paid out during the year even though the bill covers half of next year's expense(cash basis)?

Thanks!

Re: Do I need to prorate rental expenses and property taxes?

PattiF — Thu, 18 Mar 2021 19:32:12 GMT

It depends. To clarify the situation, did you rent the house from September to the end of the year?

Re: Do I need to prorate rental expenses and property taxes?

Carl — Thu, 18 Mar 2021 19:39:07 GMT

Property taxes and home insurance I paid for was for July2020 to June2021

When it comes to taxes, that is totally irrelevant. If you paid property taxes in 2020, you paid for 12 months. What 12 months those were, doesn't matter. If the property was classified as a rental from 7/1/2020 thru 12/31/2020, then 50% of your property taxes are a valid schedule E deduction, with the other 50% being claimed on SCH A.

Can I deduct the full amount of mortgage interest as rental expenses?

Using my in-service date above, no. Only 50% of the total mortgage interest paid in 2020 is a SCH E deduction.

do I count for the months the bill covers

No. The 12 month period the bill covers just doesn't matter. If you paid the bill in 2020, then you claim that percentage of the bill that covers the percentage of time the property was a rental in 2020. Whereas, if you did not pay the bill until 2021, then you could not claim any of it on your 2020 tax return.

I get the strong impression this is your first time dealing with rental property. The below information will help clarify things for you, that the program does not clarify all that well.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2^nd 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 3^rd 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.

Re: Do I need to prorate rental expenses and property taxes?

chuhuangtina — Thu, 18 Mar 2021 20:45:19 GMT

Yes, it was rented from September to December 2020.

Re: Do I need to prorate rental expenses and property taxes?

Carl — Thu, 18 Mar 2021 23:10:06 GMT

it was rented from September to December 2020.

So roughly, 4/12 of your property taxes, mortgage interest and property insurance are a SCH E expense *PROVIDED* you actually paid that expense in tax year 2020. Understand that expenses are claimed in the tax year they are paid, regardless of what tax year they pay "FOR".

For the mortgage interest and property taxes, the program does a pretty good job of doing the splits itself, allocating the property amount to the SCH E for the period of time the property was a rental, and the SCH A for the period of time it was personal use.

However, the property insurance doesn't work that way. You'll have to pro-rate that yourself. For the percentage of time it was a rental in 2020 you can claim an equal percentage of the insurance that you paid in 2020 *REGARDLESS* of the actual period of time that insurance policy covers. But the percentage of insurance for the period of time the property was *not* a rental, is just flat out not deductible at all, anywhere on your tax return.

For all other expenses, you should only be entering those expenses incurred "AFTER" you converted the property to rental property.

Re: Do I need to prorate rental expenses and property taxes?

electronabs — Thu, 09 Feb 2023 06:19:08 GMT

You mentioned that following, but mine doesn't do that when including the information. Can you please walk me through the steps?

"For the mortgage interest and property taxes, the program does a pretty good job of doing the splits itself, allocating the property amount to the SCH E for the period of time the property was a rental, and the SCH A for the period of time it was personal use."

Re: Do I need to prorate rental expenses and property taxes?

DianeW777 — Thu, 09 Feb 2023 14:46:07 GMT

From the time the property was available for rent and marketed as such, and if there was no personal use after that date, all expenses paid from that date forward would be allowed in full. If you paid property taxes and/or mortgage interest for the whole year and the property was not available for rent until later in the year or it was used for personal purposes before it was a rental, then certain expenses must be prorated.

My advice is to calculate the property tax and mortgage interest that pertains to the rental period for this partial year of rental activity. Enter that portion in the rental activity and the remainder under Deductions and Credits. In this section TurboTax Online explains to enter the rental portion in that section.

@electronabs

Re: Do I need to prorate rental expenses and property taxes?

electronabs — Fri, 10 Feb 2023 06:40:03 GMT

I have trouble using TurboTax to enter all the information it is requesting. For example, under "Assets, New Rental Property," Almost all entries point to box numbers in HUD, and we all know HUD no longer exists, and ALTA Settlement Statement does instead. That makes it very difficult to map the two. Now I am very stuck and can't continue using the software. I am getting frustrated trying to map the HUD box info requested in TurboTax to the ALTA Settlement Statement. I feel like quitting to do it myself and going back to a tax company to do it for me. This will be my last attempt before I quit, so hopefully, someone can help me. Thanks.

Re: Do I need to prorate rental expenses and property taxes?

DianeW777 — Fri, 10 Feb 2023 14:15:15 GMT

We can help. There are many pieces of information when property is purchased. The Settlement Statement (HUD or otherwise) is a tool used to help you find what you need to use for your rental. Provided are costs that are currently an expense and costs that must be added to the cost of the property itself.

The following expenses would be added to the cost basis of the rental (purchase price):

Title fees, transfer fees, legal fees, document recording fees, etc.
- You can enter one figure as your basis for depreciation without enter individual amounts. Add then all together, then enter the total. Keep your statement with your tax files.

The following expenses would be deducted as an expense on your rental activity if the purchase occurred in 2022:

Prorated mortgage interest (If it is the same bank, it may or may not be included in your 1098), prorated property taxes
- If this is the year of purchase, you would use the property taxes from the Settlement Statement and not the amount you paid later, if applicable. The Settlement Statement prorates the full amount to both the buyer and seller in the year of purchase.
- Do NOT use payments made to escrow. Expenses paid from escrow are deductible, if applicable.

@electronabs

Re: Do I need to prorate rental expenses and property taxes?

balajipramesh — Tue, 04 Apr 2023 10:30:16 GMT

Under "RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED" you have mentioned "Repair expenses incurred are only deductible if incurred while the property is classified as a rental."

When do you say the property is classified as a rental? In my situation I "In Service Date" was 1/7/2022, but the renter moved in only by 2/10/2022. The days b/w 1/7/2022 to 2/9/2022 it was vacant. And during this vacant period I ran into bad weather and fence broke so had to repair it. After many showings needed to perform cleaning for the renter to move in. So would I be able to consider the cost of the repair and cleaning as maintenance / repair expenses?

Re: Do I need to prorate rental expenses and property taxes?

Carl — Tue, 04 Apr 2023 11:41:46 GMT

In my situation I "In Service Date" was 1/7/2022, but the renter moved in only by 2/10/2022. The days b/w 1/7/2022 to 2/9/2022 it was vacant.

This is no different than when a business closes on the weekend. The property is "still" classified as a business.

The rental unit was classified as a rental since 1/7/2022. The fact a renter wasn't physically living in it for a few months, is irrelevant. A renter "could" have moved in on 1/7/2022 and you were not living in the property as your primary residence, 2nd home, vacation home, or any other type of "personal use" scenario for one single day after 1/7/2022.

Your business use percentage of the property is still 100%. Days rented is 325 days. Days of personal use is ZERO.

Any expenses incurred after 1/7/2022 are deductible on the SCH E as a rental expense.

Re: Do I need to prorate rental expenses and property taxes?

Wookie_Bender — Wed, 24 Jan 2024 22:23:38 GMT

This contradicts Carl's post, which instructs the user to enter the full amount of the property tax bill in the rental expense section, which TurboTax will then allocate between Schedule E and Schedule A.

Re: Do I need to prorate rental expenses and property taxes?

PatriciaV — Thu, 25 Jan 2024 13:59:56 GMT

Please clarify "what" contradicts Carl's post. TurboTax will allocate Mortgage Interest and Property Tax between Schedule E and Schedule A, based on the percentage of time the property was available for rent. We recommend that you complete the Rental Property section first to allow the program to calculate the allocation correctly.

Re: Do I need to prorate rental expenses and property taxes?

Wookie_Bender — Fri, 26 Jan 2024 09:12:38 GMT

I was replying to the first post by DianeW777.

Re: Do I need to prorate rental expenses and property taxes?

Carl — Sat, 27 Jan 2024 03:16:03 GMT

When renting a part of your home, you have a choice to either let the program do the splits "for you", or you can do them manually.

If you elect to have the program do the splits "for you", it's important to understand the program does not and can not "CORRECTLY" split everything in every situation. For example, since property insurance is not deductible for the personal use portion and therefore can not be claimed anywhere on the tax return, the program can not and does not pro-rate the property insurance. You still have to do that manually. If people would read the small print on each and every screen, they would no that. But it's rare for people to do that. Therefore, I suggest folks to do the splits all manually. Typically, this manual process is only needed in the first year. After that, the only thing that "I know for a fact" they will have to split manually each and every year, is the property insurance, since it gets prorated for the SCH E only.

Re: Do I need to prorate rental expenses and property taxes?

Wookie_Bender — Sat, 27 Jan 2024 08:53:26 GMT

Sorry Carl, I've been unable to locate the small print or the option to split "for you" that you describe. TurboTax simply says "Total up all real estate taxes and enter them below", with no other buttons or details.

Just to clarify: my rental property is not a subspace of my own residence; rather, it is a single-dwelling, single-family home that was purchased midway through the year.

Just to confirm: I can safely enter the full amount of its annual property tax bill, and TurboTax will allocate that between Schedule E and Schedule A based on the "available date" I entered in the Assets section, correct?

Re: Do I need to prorate rental expenses and property taxes?

Anonymous_ — Sat, 27 Jan 2024 14:18:55 GMT

@Wookie_Bender wrote:
Just to confirm: I can safely enter the full amount of its annual property tax bill, and TurboTax will allocate that between Schedule E and Schedule A based on the "available date" I entered in the Assets section, correct?

Doing as you described should result in your depreciation deduction being calculated properly.

Re: Do I need to prorate rental expenses and property taxes?

wendywang — Thu, 13 Mar 2025 21:50:34 GMT

I bought rental property in Sep 24 and paid property taxes 10K in 24. Prorate rental property tax 4K as expense (4 months). what happen to 6K property tax?