We decided to sell our rental property this year and did not make the property available for rent all year. We did manage to sell, but now I'm wondering if we can claim the mortgage interest and property tax on it as a second home since we had no rental activity.
Since it was not available to rent during the time, my reading would suggest that we can not take them as rental expenses. Is there something we would have to do to convert it to a second home tax wise?
I've already calculated the basis based on the depreciation we have taken over the years as well as the capital improvements and selling expenses.
Thanks
Basically, if you did not live in the property for one single day *as your primary residence* then there is really no need to convert the property to personal use. Keep in classified as rental property and report it as the sale of rental property, since that is "in fact" what you sold.
Now the way this will work, is that you will claim zero rental income, and you will claim your rental expenses. However, understand that you MUST separate your rental expenses from your sales expenses. Sales expenses can include costs incurred while "preparing the property for sale".
For example, replacing a broken door knob would normally be a rental expense. However, you didn't fix that door knob for the purpose of renting it... you fixed it for the purpose of selling it. So it's a sales expense. See the difference?
Also, when asked the number of days rented during the tax year, you *MUST* indicate at least 1 day, and doing so will be fine. So how can it be rented for one day in 2018, with no rental income? Easy.
Rental period runs through the 2nd of every month. So renter paid a months rent on Dec 2 2017, which was claimed on the 2017 tax return. Then renter continued to occupy the house on Jan 1 2018 since that was a day of rent they paid for in 2017, and they moved out on Jan 2.
You have to do this, because if you indicate that you did not rent it for at least one day in the tax year, then the program will delete the SCH E and all information, including the depreciation history, related to the rental. That will create a nightmare for properly reporting the sale then.
Now, here's how to report the sale in TurboTax so the program does all the math for you, including depreciation recapture and all that other stuff that hopefully, you haven't wasted time doing the math yourself. Though it doesn't hurt so you can "confirm" the program did things right. But in those situations, I usually find the program was right and it was the seller that made the mistake.
If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.
Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will ahve a selection on it for "I sold or otherwise disposed of this property in 2017". Select it. After you select the "I sold or otherwise disposed of this property in 2017" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).
Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets. You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset. Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise if you sold at a loss then you must show a loss on all assets, even if that loss is $1
Basically when working through an asset you select the option for "I stopped using this asset in 2017" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.
When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.