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 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 deductible.
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.
- DO NOT register or pay your online TurboTax fees until you are *COMPLETELY* finished with your taxes. Once you pay, you flat out can not elect the option to "start over".
- As a first time landlord, I have no doubt that you *will* be starting over more than once. It's how you learn how this program works. 99% of what I know about the program is what *not* to do, and I didn't learn it, by not doing it. Same will hold true for you.
- When you get to a point where it's time to "start over", on your left select Options, then Tools, then the "clear and start over" option. Note that when you do this, it will clear your 2018 tax return *ENTIRELY* and you will be starting over from scratch. Expect this, and expect to need to do this more than once. You don't learn this stuff through osmosis.
As you work through the rental, you'll find that there is a specific box in the rental expenses section for "management fees". Be careful here. If your property manager issues you a 1099-MISC with what they paid you reported in box 1 of that 1099-MISC, if the amount in that box does "NOT" include the management fees they withheld from the rent before paying the remaining rent to you, then you do "NOT" have any management fees to claim. Gotta be careful that you don't double-dip here on the deductible rental expenses.
Now, below in the answer box is information that I already know you will "NEED". It provides clarity where the program does not. But one thing I do want to point out when working this rental property through for the very first time is this:
PERFECTION IS NOT AN OPTION! IT"S AN ABSOLUTE MUST!
Getting even the tiniest thing wrong in that first year has a very, very high potential of becoming exponentially worse as the years pass. Then when you catch the error a few years down the road (if the IRS doesn't catch it first) the cost of fixing that error will be *expensive*. So if you have any questions, please ASK!. The only stupid question, is the one you didn't ask. Remember, since this is your first time dealing with a rental property, perfection is NOT an option.
I'd like to run something else by you, if you don't mind. My rent is paid to me directly from the tenant via wire transfer to my checking account. And I pay my property manager his fee directly using the same method. There also is no 1099-Misc involved. Will this be a problem?
Please note that you are *NOT* required to issue a 1099-MISC to your property manager, unless you are paying an "individual" more than $600 in a tax year. If you are paying a property management "business", then it doesn't matter how much you pay the business, you are not required to issue a 1099-MISC.
Also, if I interpret one of your above comments correctly, you're paying $300 a month in rental management fees. Unless you're charging $3000 a month rent, that is gawd-awful high for a management fee. The standard is 10% of the rent paid each month, and the property manager only gets their 10% cut in months the property is actually rented out.
If you are paying an individual more than $600 in the tax year, then you will need to issue that individual a 1099-MISC. You can't do that with the Premier version of TurboTax though. You either need to upgrade to the Self-Employed version, or you can do it online with an account you create at <a rel="nofollow" target="_blank" href="https://quickemployerforms.intuit.com/signin.htm">https://quickemployerforms.intuit.com/signin.htm</... copy that goes to the IRS can be sent electronically, and you'll need to print the copy you are required to send to the individual.
Now to do this, you will "require" either the SSN or the EIN (Employer Identification Number) of the person you will be issuing the 1099-MISC to. They are required by law to provide it. Now I'm sure you can understand one's reluctance to share their SSN. So inform your property manager that they can obtain an EIN free of charge directly from the IRS at <a rel="nofollow" target="_blank" href="https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n...> and it only takes about 10 minutes.
"RIGHT NOW" you may need to send your property manager an IRS Form W-9 (<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/fw9.pdf">https://www.irs.gov/pub/irs-pdf/fw9.pdf</a>) to get the SSN/EIN that you require, in order for you to complete your taxes on time. Read the instructions included with the referenced form. If the 1099-MISC is required to be issued, then you are also required to keep the W-9 on file once it's completed by the manager and returned to you. You will need that information every year you pay that property manager more than $600.
As a good practice, anytime you hire an individual to manager your rental property, you need to make it clear to them that they don't get paid until you have a completed W-9 from them.
Since it was your personal residence prior to being rental property, that means those deductible expenses incurred during the time it was your residence are claimed on SCH A, and for the time it was rental are claimed on SCH E. Now for the first two expense screens it gets tricky.
- Property insurance is not a deductible expense for the period of time it was your residence. Property insurance has never been a deductible expense on your residence or 2nd home. So you need to pro-rate the amount you enter for the rental.
- Property taxes are deductible no matter what. If you elected to have the program do the splits for you, then enter the total amount paid for the year and the program takes care of the splits. You'll be able to check this later to confirm that the program did "in fact" to the split for you.
- Mortgage interest. It's important to read the screen. I can't stress that enough. If you chose to have the program do the splits for you, you'll enter the entire amount of mortgage interest you paid in 2018. You'll be able to confirm the program did the splits later.
For all other items in the rental expenses section, you enter only what was paid during the period of time the property was classified as a rental. That's because things like cleaning/maintenance expense are only deductible for the period of time it was a rental. So there's nothing for that item to split with the SCH A.
After you have totally and completely finished the rental expenses section, if you need help confirming any splits took place just let me know and I"ll talk you through the process. This will have you "jumping around" in the program so my explicit navigation instructions may not be "spot on" since you're using the online version of TurboTax. I myself use the desktop version as I have a problem with storing my personal information on a privately owned computer that I have no control over.