I am trying to calculate my depreciation amount. From what I read it is the purchase price + closing costs. Can I include the closing cost if it is paid by the seller?

[jennifervphan]

Hello, to clarify your questions:

I want to go back and clarify some things.  The closing statement @jennifervphan provided is dated 2021. You might be preparing a 2022 tax return or you might be planning for 2023.  (Or did you place the home in service as a rental in 2021 and you are preparing a very late 2021 tax return?)

Answer: I purchased the duplex (its two 1BR1BA that share the same roof) in July 2021. I had one tenant in place in one unit and lived into the second unit from Sept 2021 - Aug 31, 2022. In Sept 2022 I moved to NY and rented out the unit that I was staying in. I realized recently that the depreciation was calculated incorrectly and I had accidently double-dipped the mortgage interest deductions in both Schedule A and Schedule E. I will be amending 2021 and 2022 tax year so it's important that the depreciation amount is correct. Attached is the assessor land value. I highlighted in yellow the numbers I am using since I purchased it in 2021.

When was, or will, the property be placed in service as a rental? Was it used as your personal home before it was placed in service as a rental?

Answer: Placed as a rental in July 2021. In 2021, both units were rented out from July to Aug 31, 2021, then half rented out from Sept 2021 - Aug 31, 2022 since I lived in a unit. Starting in Sept 2022 to present, it is both rented out as a rental property.

If we consider the mortgage points only, separate from any other fees, the points may be deductible on your personal schedule A as an itemized deduction in 2021, the year of the home purchase. Or, they might be amortized over the life of the mortgage. If you deducted the points in full on your 2021 schedule A, then you can’t deduct them again as a rental expense in 2022 or 2023. 

Answer: I see, I am taking a look at my 2021 tax return and I see it listed on Schedule A, line 8c. Is there someone at Turbotax that can help me review my 2021 and 2022 tax returns? I am in a pickle because I processed these tax returns myself without a CPA and as a first time home-buyer so now I will have to amend the returns myself and I am really afraid of doing it wrong. Thank you!

[Opus 17]

Turbotax doesn't offer paid review of prior tax returns, sorry.  @AmeliesUncle  and @Carl can probably help quite a bit.

From my point of view:

In general, starting in 2021, you should have deducted half your mortgage interest on schedule A (your personal home) and half on schedule E (rental expense).  (It might not be exactly 50/50 if one unit is bigger than the other.  You might assign a percentage based on square footage if the units are significantly different in size.)  You should have listed the rental unit 1 in your tax program as rental property in service with a basis equal to half the purchase price minus half the land value.  In 2021, you could have chosen (I think) to deduct half the mortgage points for your personal residence on schedule A, but the other half of the mortgage points would be amortized on schedule E as an expense on unit 1, spread out over the life of the mortgage (probably 30 years).  Your points are line A.01 on the second statement.

When you moved out and rented the second unit in September 2022, you would have listed unit 2 as a NEW (second) property in Turbotax, using as your depreciation basis, half the purchase price minus half the value of the land.  (The basis of unit 2 is actually half the original basis or half the fair market value at that time, whichever is lower.  But the property probably didn't lose value in the real estate market in 2022.)  You can also increase the basis of unit 2 by the cost of any permanent improvements (like a new floor, bathroom renovation, etc.)   So now you have 2 rental properties in Turbotax, one that started in 2021 and one that started in 2022.

Your mortgage interest on unit 2 would be deductible as personal mortgage interest on schedule A up to September, and then as a rental expense on schedule E after that.

The costs of obtaining a loan for a rental property are amortizable over the life of the loan (if 30 year, or 360 months, you would divide the total cost by 360 and include 1/360th for each month the unit was a rental in the tax year.  So 6 months in 2021, 12 months in 2022.  Those costs appear to be: 

• NFM Lending underwriting
• NFM Lending validation
• NFM lending processing fee
• Lender's title insurance
• Sales tax on Lenders title insurance
• Appraisal fee
• Credit report
• Mortgage insurance premium

Now my problem, where I need another expert to help me, is how to divide those costs given that 1 unit was a rental right away but the other rental was personal for 15 months.  I am reasonably confident that you can take 1/2 the loan costs (for unit 1) and spread them out over the life of the mortgage, starting in July 2021.

However, I don't know if you can recover the costs for unit 2 in the same way starting in September 2022, or if you lose the ability to deduct those costs because of the intervening personal use.  Someone else will have to clean up my answer. 

As far as the points are concerned, if you deducted half your points for the personal unit all at once in 2021, then you have no more points to deduct, and you just carry on spreading out the points on the first rental unit  until you used up 360 months worth.  If you also spread out the points on your personal unit, then you can transfer those points to the rental unit and deduct them over the remaining life of the loan. 

[jennifervphan]

Thank you, confirming I have read your message but will reread again thoroughly as I am drafting up my amendment.