Semi conversion of rental property to owner occupied home with tenants

[plucksandclucks]

I have owned a retail property for many years and filed schedule E accordingly. In 2025, due to a divorce, I rented the property from 1/1/25 to 5/31/25 at which time I moved into the property as my personal residence. I adde d two tenants at that time who pay rent. Do I still show this as a conversion from rental to personal use or do I file two separate schedule E's for the two distant periods of 1/1/25 to 5/31/25 and then 6/1/25 to 12/31/25? How do I report the rental income and expenses from 6/1/25 to 12/31/25 and, if there is a loss can I report the loss or am I limited to showing zero as the next income?

[DianeW777]

This does get somewhat complicated. It may be easiest to split the rental into two separate activities assuming you had tenants when you also used it as a personal residence (assumed from your notes and questions). 

First is the period when you used part of the property as your personal residence:

1. Assuming the original rental activity is still on your tax return for 2025, you would need to add expenses that only apply to the tenants. 
2. Convert this property to personal use on June 1, 2025. 
3. The calculated depreciation will be on the entire property so the difference will be added as other income to offset that expense. Calculate the square feet of rental space divided by the total square feet of the rental home to arrive at the business use percentage. Multiply that by the total depreciation and the difference should be added as other income to cancel out the extra depreciation expense.

Second is the rental property after you moved out:

1. Start a new rental property on your tax return. The rental property asset must be added to the tax return as though you continued to rent it for the full year (same cost basis, same land, same date placed in service, etc). You are the same owner so the house must retain it's correct character as if it never changed. Again, the depreciation will be a full year, however it will be 100% rental so simply divide the depreciation by 12 months then multiply by 7 months (based on your dates). This will be the business use depreciation expense and the difference should be added to rental income for this property for the same reasons noted.

This advice is the most accurate way to arrive at the correct totals and it's much too complicated for software to calculate on it's own. This retains the property as it should and you revert back to your usual process for future years. Also, this maintains the property for tax rules and consequences currently and for a potential sale in the future.

If you have a loss, at least some of the loss should be allowed based on the passive activity loss (PALs) rules.

Phaseout Rule: The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that’s more than $100,000 ($50,000 if you’re married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you’re married filing separately), you generally can’t use the special allowance. This is because the special allowance is reduced to $0 since the modified adjusted gross income is over the $100,000 amount.

[plucksandclucks]

Response to rental property was reversed in order of events.

Subject property was rented from 1/1/25 to 5/31/25 and had been continuously rented from 2006

Due to a divorce the owner moved into the property on June 5, 2025, and has sublet it to tenants from 6/5/25 to date. That arrangement continues to and beyond the current date of 3/31/26.

I cannot locate the "box" to indicate, "conversion to private use" anywhere. Frustrating.

I think I need two Schedule E's for the rental phase and one for the "personal use" phase. The first one is a continuation of the rental up to 5/31/25 and the 2nd Schedule E is for the private ownership with tenants phase.

[DianeW777]

Yes, you will enter the two rentals as explained unless you had no tenants when you used it for personal purposes. If there were no tenants when you used it as your personal residence, then there will be no expenses allowed during January-May, 2025. If this is the case, ignore entering a second rental and follow the guidelines for the depreciation in the previous answer (posted here for your convenience).

• The depreciation will be a full year, however it will be 100% rental so simply divide the depreciation by 12 months then multiply by 7 months (based on your dates). This will be the business use depreciation expense and the difference should be added to rental income for this property for an accurate reflection of depreciation for only June-December, 2025. Next year resume as usual

The question is actual inside the home asset and this should make it more clear for you. The following information should get you to the question you need to answer.

First you must select check box as indicated below in the assets section. 

1. Go through several screens until you get to Tell Us More About This Rental Asset
2. Click on This item was sold…….   And continue to answer the question without adding a sale date and selecting it was converted to personal use.

@plucksandclucks 

[plucksandclucks]

I am in agreement that the steps necessary are complicated/convoluted. I determined the correct numbers via a spreadsheet and then jury rigged the percentages on the schedule E worksheets (two) for the same property with different titles and the asset entry worksheet in order to generate the correct numbers for both schedule E's.  I have been able to produce matching numbers except for the mortgage interest and property taxes allocable to schedule A. It may be moot on schedule A if we just take the standard deduction tbd. It was so much easier to produce the numbers on a spreadsheet than using Turbo Tax.  I'm going to take a break as I now have a headache.