Personal residence converted t o rental

[amyonghwee]

In mid July this year 2023, I moved out of my personal residence in CA and started renting this out. Do I report this as 2 items

- personal residence 

- rental property

and prorate the property taxes accordingly to duration ?

[Anonymous_]

---

@amyonghwee wrote:

and prorate the property taxes accordingly to duration ?

---

You will report the rental as being available in July of 2023 in the Rental Properties and Royalties section of the program. 

Depreciation will begin as of the date you placed the property in service as a rental.

Using the program, there is a method to have the allocations done for you but, frankly, you are better off doing the calculations manually and entering those figures into the program.

Note that there are certain expenses that you would not prorate, such as advertising, commissions, repairs when the property is available for rent, and any other expenses that are exclusive to rental use.

[Opus 17]

Specifically for property taxes, yes.  The portion belonging to the rental period are a rental expense on schedule E and the portion belonging to personal use are an itemized deduction on Schedule A.  There are a lot of other issues with taxes on property rentals, you might want to buy or borrow a good book on the subject. 

[amyonghwee]

How do I handle the rental property depreciation ? 

This house is bought in 2010 and only converted to rental in Aug 2023.

In TT,  I selected "Residential rental real estate". Then it asks for "cost", "cost of land" and "date purchased or acquired".

For "date purchased or acquired", do I use the 2010 date  or   the July 2023 date..

I believe I can use the 2023 property tax bill for the "cost" and "cost of land".  Do I need to prorate this since rental starts from Auf 2023?

[amyonghwee]

Additional question : I replaced old HVAC with a new HVAC in 2019, costing $14,200. 

How do I handle depreciation for this ?

Thanks!

[DianeW777]

Yes, you can use the tax bill or assessment to determine the land value and building/home value.  As far as the cost of the assets when you enter them into the rental activity see the IRS rule.

The IRS requires the use of the lower of:

1. fair market value (FMV) on the date of conversion to residential rental from personal home, OR 
2. the actual cost of the home
   • See IRS Publication 527

In you case the actual cost of the home, which includes the original purchase price, purchase expenses, capital improvements from the date of ownership until converted and land.  You can use the tax assessment to determine the amount to use as the land portion.

• land assessment divided by the combined total of land and home = percentage of cost that should be land

As far as the HVAC, this can be added to the cost basis of the home. The entire cost of the home is depreciated over 27.5 years with a mid month convention.  This simply means there is a half month for the month placed in service and month removed from service , then a whole month for all other months.

Note:  When you enter the house and the land you will enter the combined total in the amount of the asset, then the land cost.  TurboTax will reduce the total by the land and depreciate the correct amount for the house.

In 2023 you fully converted this house to rental, so be sure to say it was rented 100% of the time from the date placed in service and that it was rented at fair rental value (FRV), if that is true.  This will allow TurboTax to calculate the proper depreciation.

I would advise to do manual calculations for the rental period of the year for other expenses you had such as utilities, property taxes, mortgage interest, home owners insurance, etc. Next year it will be all handled at 100% of all expenses.

@amyonghwee 

[Opus 17]

---

@amyonghwee wrote:

How do I handle the rental property depreciation ? 

This house is bought in 2010 and only converted to rental in Aug 2023.

In TT,  I selected "Residential rental real estate". Then it asks for "cost", "cost of land" and "date purchased or acquired".

For "date purchased or acquired", do I use the 2010 date  or   the July 2023 date..

I believe I can use the 2023 property tax bill for the "cost" and "cost of land".  Do I need to prorate this since rental starts from Auf 2023?

---

Your cost basis is the price you paid for the property originally, plus the price you paid to make any permanent improvements.   (This covers your HVAC question.)  The cost of the land is not reported on your property tax bill, because that reports the current value.   But you might use the same percentage.  For example, if currently your bill estimates the land is 20% of the total value of your property, then the cost of the land in 2010 might have been 20% of the price you paid in 2021.   Date purchased is the date you purchased the property, in 2010.

The purpose of these questions is to determine how much you can deduct for depreciation (wear and tear on the property).  Somewhere else you are asked "when did you place the property in service", that is the date the property was available and listed for rental, even if you did not get a tenant right away.  The program will pro-rate your depreciation based on that date.  

[amyonghwee]

Can the monthly home owners association fees (payment made before conversion to rental) be added to cost basis ?

[PaulaM]

Only capital improvements made by the HOA to increase the value of your property can be added to basis. Most HOA expenses would fall under regular budgetary maintenance and repairs and NOT capital improvements. These are notable investments that increase value of your property.