This is a long post. So by all means please print it out to make things easier for you, and because it contains information that you will find helpful in 2 years when you have to start reporting this rental on your taxes again.
Then you need to convert this property back to personal use with a conversion date of 1/1/2016. You don't have a choice here since you demonstrated no intent to rent in 2016, and do not plan to rent in 2017. After you finish this, you must print out your 2016 return *AFTER* it has been e-filed *AND* accepted by the IRS. When you print, do not print just the forms required for filing, or the forums to "keep for your records". You'll need to print everything so that you will have all worksheets and calculation forms. You will need information off these 2016 forms when you convert the property back to a rental on your 2018 tax return. Since you will not be renting in 2017, then when you do your 2017 taxes the information on this rental will *NOT* be carried forward to your 2017. So it is imperative that you print your 2016 return in it's entirety. Now for how to totally and completely convert everything to personal use, followed by an explanation of what you can and can not claim/deduct for this property on your 2016 return.
Start working through your rental and on the Rental & Royalty summary screen elect to edit the rental.
Leave the property profile section alone.
For rental income you MUST enter a digit, even though that digit will be a zero (program quirk, so that's why).
For rental expenses, you won't even work this section through. You have absolutely no deductible rental expenses for 2016. (Don't be alarmed. You do have deductions for this property on your 2016 return. They're just not rental expenses is all.)
Now, elect to edit/update the Assets/Depreciation and select "yes, I want to go to my asset summary" and continue. Then select NO and continue. Then select NO a 2nd time and continue. You're now on the "Your property assets" screen.
Here you will have listed at an absolute minimum at least the property itself. But you will need to do the following for each individual asset one at a time.
Elect to edit/update the asset and start working it through. On the screen that asks if you "stopped using this asset in 2016" select YES.
For date of sale or disposition enter 1/1/2016 and continue.
On the "Special Handling Required?" screen click YES.
Click Continue and do the same for each individual asset listed. Once you've done this for each individual asset listed you will click the ADD AN ASSET button if (and only if) you did property improvements on this property. Seeing that the property was out of service for the entire 2016 tax year, If fully suspect that much of what you can "repairs" is in fact, a property improvement. Property improvements are described below.
When you enter these property improvements make absolutely certain that on the screen with the box for "business use percentage" you enter a zero. That's because since the property was not rented (yet) after the property improvements were done, you haven't used them in your "rental business" yet. Therefore the business use percentage of those property improvements done in 2016 is zero percent. Again, the IRS definition of a "Property Improvement" is below.
Once you're done with everything on the "Your Property Assets" screen, click the DONE button.
Now, if you claimed any vehicle expenses at any time in any year this property was classified as a rental, you will need to work through the Vehicle Expenses section to show the disposition of the vehicle. Just show it as "removed for personal use" as you did for the assets and you'll be fine.
The reason for doing this is to stop depreciation on the rental property and all listed assets. Besides, you have no rental income for 2016 anyway, in which to take that depreciation from. Stopping depreciation will also help in the tax year you sell the property, since all depreciation is recaptured and taxed (no matter what) in the year you sell.
When done with the Vehicle Expenses stuff and returned to the main screen, click the "Done with Rental Property" button and that does it. Now for the expenses you can deduct.
For 2016 you can deduct the mortgage interest reported on the 1098 Mortgage Interest Statement, and the property taxes you paid in 2016. (What year those property taxes paid for doesn't matter. If you paid property taxes on this property *in* 2016, then they are deductible *on* your 2016 return.
You can not deduct or claim anything else on this property for 2016, including the property insurance you paid in 2016. Again, it does not matter what year the insurance payment was *for* either. If you paid it in 2016, then it's not deductible. Period.
Now, you claim the 1098 Mortgage Interest and property taxes, you'll deal with that in the "Your Home" section under the Deductions & Credits tab when you get to that point in the program. (You have a ways to go before you get to that.)
For the 1098 you'll work through and enter the mortgage interest and property taxes information for your primary residence first. Then you'll click the "Add a Lender" button and enter the information from the 1098 for what is now your 2nd home.
That does it. Now for those definitions I promised you, along with additional information which you will find helpful in the future when you convert it back to rental on your 2018 tax return.
-
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 Improvement.
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 classified
as cleaning/maintenance costs. They are instead classified as startup costs,
amortized as such and depreciated over time.
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 classified as startup costs, amortized as
such and depreciated over time.
Startup Costs
Please note that if
residential rental income is not your PRIMARY business, and your PRIMARY source
of income, then your rental business is considered to be passive, and you flat
out, no way, no how , are not allowed to deduct your startup costs. Period. The
IRS says so. See https://www.irs.gov/pub/irs-drop/rr-99-23.pdf and please take note that rental property
produces “passive” income, while other types of businesses produce “active”
income. Your rental property is not classified as your “active” business,
unless you are a real estate professional, an active participant in the
management of the property, and it provides a substantial (more than half)
amount of your taxable income for the year. All three requirements must be met.
There are no exceptions
Start up costs are
expenses incurred while preparing the property for rent, with the express
purpose being to prepare it for rent, before it is available for rent. These costs
do include repair, cleaning and non-recurring maintenance cost. It does NOT
include property improvements. With a normal business that produces active
income (rental income is passive) you would amortize these costs over 15 years.
But you can’t do that with a rental property. However, you can deduct a maximum
of $5000 in startup costs in the first year the rental is available for rent,
PROVIDED your total startup costs do not exeed $50,000. This is reported on
line 18, “Other Expenses” of SCH E, and should be labeled “start up expenses”.
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.
