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scurling
Level 3

Rental situation for partial and full house.

I have rented a room and bath to my son for the last 10 years in the house I own.  I've use TBTx desktop to for filing that income.  So, last year, my son rented his room for 4 months (121 days) while I was living in it also.  We both moved to different locations and I rented the entire house to new residents for the balance of the year (245 days).  I started prepping the house for the full rental in January with the rental broker, if that makes any difference.

How do I define my personal use days of the house?

How do I separate the rental percentage for 4 months, and the full (100%) rental spare for the additional 8 months?  Would I need to enter or show two separate rental incomes?

 

 

5 Replies
Carl
Level 15

Rental situation for partial and full house.

How do I separate the rental percentage for 4 months, and the full (100%) rental spare for the additional 8 months? Would I need to enter or show two separate rental incomes?

I am assuming 4 months *exactly* with the dates I"m using. You can adjust as necessary. Basically, you will convert "everything" to personal use with a conversion date of Apr 30, 2020. Then you will enter an entirely new rental property that is 100% business use with an in service date of May 1, 2020.

So work through the existing rental and about 3-4 screens in select the option for "I converted this property from a rental to personal use" Select anything else on that screen that applies too. Then continue working through the rental income and expenses section "as if" nothing has changed. You will enter the rental income received only up to the date you converted it to personal use, and only the rental expenses incurred up to the date you converted it to personal use.

Next, work through the assets/depreciation section. You must work through each individually listed asst one at a time and perform the following.

- On the first screen write down the cost basis along with the total amount of prior year's depreciation taken on that asset.

- On the screen that asks if you stopped using this asset in 2020, answer YES.

- On the screen that asks "Special Handling Required?" click YES. (If you click NO you will be *forced* to enter sales information. You did not sell this property. So click YES.)

- On the final screen write down the 4 months of depreciation that is being taken for 2020. Add this 2020 depreciation to the prior year's depreciation taken on this asset and write down the total. You *will* need this number, along with the cost of the asset.

Note that you must do the above for each individual asset listed in the assets/depreciation section.

Once you've finished the assets/depreciation section continue working it through until you have completed that specific rental property and you're on the "Rental & Royalty Summary" screen.

 

Now click the button for "Add Another Rental or Royalty" and start working it through. Take note of the following:

- Your "in service" or "conversion date" will be one day after you converted things to personal use. So in my example your date of converting it back to a rental has to be May 1, 2020 or after.

- You will only report rental income received after you converted it back to a rental.

- You will only claim expenses incurred after you converted it back to a rental.

- As you enter the assets anew (with 100% business use this time) you must reduce the cost basis on each asset by the depreciation already taken on that asset in the past. For the property itself you'll have two boxes to deal with. One call COST and the other COST OF LAND.  The amount in the COST box must be reduced by the amount of depreciation taken on the property already. The amount in the COST OF LAND box does not get reduced.

For this "new" rental property, depreciation starts over from year one with the structure being depreciated over the next 27.5 years based on the adjusted cost basis (adjusted to account for the prior depreciation already taken while it was only partially rented.)

 

If you need further assistance I"m happy to help. Just remember, the more details you can provide about your specific situation and setup, the more specific my responses can be to your specific situation.


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scurling
Level 3

Rental situation for partial and full house.

Tank you for the detailed description.  I've never worked with depreciation before, but I'll try to work through and understand your explanations.

 

I don't understand your explanation of converting the property from rental to personal.  I owned and lived in the house for the months January - April, with my some renting a room and back (~5% of the square footage).  He has done this for a number of years.

I had a rental contract for the whole house starting May 1, through the rest of the year.

Your statement about deductions.  Are you saying my upgrades and repairs done prior to the rental contract, getting the house ready, are not deductible?

thanks

Carl
Level 15

Rental situation for partial and full house.

Are you saying my upgrades and repairs done prior to the rental contract, getting the house ready, are not deductible?

No. I'm saying that repairs done before the property was "AVAILABLE FOR RENT" are not deductible. That has nothing to do with the rental contract date. The property could have been available for rent months before you actually got a rental contract and a renter moved in.

Upgrades, more commonly referred to as property improvements, are a completely different matter.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.

Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.

 

Expenses for these types of costs 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 need to 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 retain or 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.

There are rules that allow you to just flat-out expense and deduct some property improvements instead of capitalizing and depreciating them, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.

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 for the very first time are not deductible.

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 for the very first time 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.

scurling
Level 3

Rental situation for partial and full house.

Sorry for the type-o errors... makes for some hard reading.

I completed the rental section by adding another rental entry for the house, as a full rental, counting only the 8 months of the year. 

I used the original rental property entry to show the income and expenses for my son's rented section of the house.

So, I basically showed two rental income entries and entered the separate income and expenses for each.

 

Carl
Level 15

Rental situation for partial and full house.

Sounds like you've got a handle on this now. Just a few notes for the "new" rental property that is now 100% rental use.

- indicate it was rented "the whole year" and/or 100% business use. The program will base that selection on the "In service" date of May 1st, and will figure accordingly for things like depreciation.

- You "may" have a question that asks you percentage of "time" it was rented for the year. Again, indicate 100%, as the program will figure based on the in-service date.

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