Should I adjust my residential real estate depreciation Cost or Business %?

[dantuit]

I purchased a home in Dec 2021 and immediately started renting the basement as a separate unit (50%). I opted to calculate things on my own so I told TurboTax 100% rental-related portion. All expenses I split accordingly, and used De Minimis Safe Harbor to expense and not depreciate everything except for the home itself. 

Now I'm noticing on the asset depreciation part that the cost basis used the full home value, and I entered Business % as 100%. I know I split the Escrow Fees but not the actual home.

Should I have split the Fair Market Value in half when I entered it, and just kept it as 100% Business? And what do I do now?

[ShirlynW]

I suggest allowing TurboTax to do the calculations.

Here are the steps to enter rental property to include deprecation:

1. Open TurboTax.
2. Go to Rental Properties and Royalties, Edit/ Update.
3. On the screen, "Rental an Royalty Summary," delete the entry.
4. Select Add Another Rental or Royalty.
5. Select Rental property and enter the information about the property.
6. Select the type of property.
7. Select any of the situations that apply to this property. (I rented out part of my home).
8. Answer "Was This Property Rented…"
9. Answer the "Property Ownership."
10. On the screen, "Let's Us calculate…", select "No."
11. On the screen, "Let's Find Out…" select the "EasyGuide".
12. Enter the Rental Income.
13. Enter the Expenses.
14. Assets/Deprecation, Update.
15. On the screen, "Describe This Asset", select Rental Real Estate Property.
16. On the screen, "Enter Purchase Price," enter the information. (This helps TurboTax determine your depreciation deduction.")
17. Continue entering the information.

[dantuit]

Thanks for the response. I re-read what I posted and realized I didn’t explain it clearly. Apologies. Let me try again:

We purchased our home (our primary residence) in Dec 2021 and when we moved in we immediately started renting the basement as a separate unit (50% sq ft). On my 2021 taxes last year, I told TurboTax that I will do the calculations on my own. I calculated the expenses at 50% for shared items and 100% for items that were just for the rental, and used De Minimis Safe Harbor election so that I could expense everything we purchased to prepare the home, and not have to depreciate the items.

As for the depreciation of the home itself, I treated it like its own separate entity and entered 100% Business Use into TurboTax, and I manually calculated 50% on things like Escrow Fees before I entered them, but I must have entered the full value of the home.

So now that I’m reviewing things for this 2022 tax year, I’m seeing that the full value of the home was entered and it’s being depreciated as you’d expect – it will be a lot of depreciation this year and I need to correct this somehow.

First, should I have calculated 50% of the Fair Market Value of the home in TurboTax last year and entered that, so the cost basis would come out correct? Or should I have entered Business Use at 50%?

And second, how do I correct this going forward? Can it be done with TurboTax or do I need to hire a professional at this point?

[JosephS1 · Accepted solution]

ShirlynW gives you all the steps you need to follow with perhaps one exception.  Since you are manually splitting and entering the expense, when you get to step 16, you should base the price on the allocation of square footage of the amount of square footage rented to the total square footage of the entire house.  

Since your statement has that you took rental income and expenses for 2021, you will have to make an entry in the assets section for prior depreciation taken on the rental section of the property.  While not strictly by the rules, it should accomplish the correction you need to make for 2022 and forward.

One other option is to go into the rental asset and edit the purchase price of the asset and the land cost.  Accomplishes the same thing but with a lot less steps.  

Officially, however, what you should do is amend your 2021 tax return to correct the erroneous amounts entered and correct the asset's net basis going in to 2022.

@dantuit