Primary residence converted to rental mid year-Mortgage interest deduction

[kotap004]

Hi

I converted my first home primary residence to rental in June 2021 (loan 600k). I purchased a second home in April 2021 (loan 1.2 M)  and used it as primary residence. I manually split and entered mortgage interest deduction and property taxes on schedule E and Schedule A based on the time I used first home as primary vs rental. However, when I look at mortgage interest deduction worksheet, it is calculating the average loan balance incorrectly. It is adding principal balance on both first and second home and reporting average balance as 1.8 M, since this is > 750K, it is limiting my total deduction. This is not correct as I only used first home as primary for 4 months, converted to rental and then used a second home as residence. I am getting less deduction because of this. How do I fix my balance and this error?

[RaifH · Accepted solution]

Mark both the home you converted to a rental and your new home as your primary home. This is correct because the first home was your primary home for the period you were using it as a personal deduction. When it asks Let's see if this is the most recent form for this loan for the old home that is currently a rental, answer No. 

Once you enter it this way, TurboTax will calculate your loan limit solely on your outstanding loan of 1.2 million. 

[kotap004]

Thank you @RaifH  

Your solution was perfect and helped me calculate the correct deduction and refund

[bellacalena]

I am in a similar situation. I purchased a second home as my primary residence now. I kept my first house which I lived in for 6 months of the year and rented it out for the last 6 months. I understand I have to enter both houses as primary residences with their respective dates to claim the mortgage interest as a deduction. But then I have to enter one of them as the rental property to report the rental income. How do I report the mortgage interest if the 1098 shows  the interest for the entire year and the rental was only for 6 months? I just want to make sure that the mortgage interest is not being entered twice and considered "double dipping". Thanks!

[AnnetteB6]

The mortgage interest for your primary home that was converted to a rental property will be split between Schedule A and Schedule E, based on the number of months it was used as a home or rental.  You will only enter the mortgage information one time, on Schedule E (Rental Income and Expenses).

When you are entering the information for your rental income and expenses, be sure to indicate that you converted your home to a rental.  This will allow you to include information about when it was converted to a rental property.

Then, include the mortgage interest for the converted home as you work through the rental income and expenses section.  This will report the rental mortgage interest on Schedule E.  TurboTax will prorate the amount.  The personal portion of the mortgage interest will be reported on Schedule A automatically.  You will not need to enter it again when you are going through the itemized deductions section of your return.

To go directly to the section of the tax return to enter information about rental income and expenses, use these steps:

• On the top row of the TurboTax online screen, click on Search (or for CD/downloaded TurboTax locate the search box in the upper right corner) 
• This opens a box where you can type in “rental income and expenses” (be sure to enter exactly as shown here) and click the magnifying glass (or for CD/downloaded TurboTax, click Find)
• The search results will give you an option to “Jump to rental income and expenses”
• Click on the blue “Jump to rental income and expenses” link and enter your information

@bellacalena

[bellacalena]

Thank you for your response! It is now asking me if I refinanced the rental home. I did refinance it that year but before I converted it to a rental property. Do I still need to list this? If so, It is asking me for rental use percentage.

[RobertB4444]

In that case answer 'no'.  You did not refinance the rental home, it was your primary home at the time.

@bellacalena 

[bellacalena]

Thank you! Now I am trying to figure out this rental asset section. It looks like I have to add the rental property as an asset. I just want to make sure I understand this section and I am not filling it out needlessly. This is my situation.

I have a primary residence which I have a mortgage for. I have a rental property which I also have a mortgage for. I refinanced my rental property in 2021 when it was still my primary residence. It has been rented out since July 2021. If I have to list it as a rental asset, this section is asking me to enter purchase information. I am assuming I enter the info from the refinance and not from my original purchase in 2016?? It is also asking me to enter the date I began using it for 100% business (rental income) which was in July 2021. Am I required to fill out the rental asset section?

[DianeW777]

Yes you must fill out the rental asset section. When your home was converted to a rental property you enter the asset as follows.

1. Use the original cost plus purchase costs from your original settlement statement, then add all costs for any capital improvements.
2. Next check the fair market value of your rental home for your area.
   1. You must use the lower of actual cost in 1. above or the FMV whichever is less for the asset cost when a home is converted from personal use to rental use.
3. Figure out how much of the cost was land value (use your county or city property tax assessment to find the percentage of land then multiply that by the cost calculated in 1. above.

You will be asked to enter the full cost and then the land value, the date acquired and the date you placed it in service for rental purposes.  Be sure to select that you converted this property from personal use to rental use.  DO NOT enter any personal use days. Instead, you will select it was rented all year and at fair rental value (if you are not renting to a relative for a lower amount of rent than would be expected in your area).

As far as repairs, cleaning, etc., after it was converted, all expenses to maintain the property are deductible after the date placed in service, as long as it was available for rent.  As you indicated, you must prorate the real estate taxes and the mortgage interest and insurance.

• IRS Publication 527

When you are in the rental activity for 2022, you must select the 'Assets' section, then in each asset you must go to the screen titled 'Tell Us More About This Rental Asset'. 

1. Once you reach this screen for each asset, you must select 'This item was sold, retired, stolen, destroyed, disposed of, converted to personal use....' 
2. Next enter the date you stopped using the asset for rental purposes. And answer 'Yes' you always used this asset 100% of the time for business. (The percentage of use doesn't change until after conversion from rental to personal use.)
3. Select 'Yes' for Special Handling due to 'You converted the asset to 100% personal use'.

You may see some depreciation expense which will be the partial year amount.  For the period of the year it was available for rent, you may have some expenses which are allowed for that open period.  

Keep all of these records because you will need them when and if you sell this home. All depreciation will be recaptured at that time, regardless of how long you hold the property for personal use. The records are necessary until you completely dispose of or sell the property.

@bellacalena