Purchased home as primary residence (but also renting out part of it)

[ssf-gm]

How should I treat a property that is both my primary residence and a rental property for tax purposes?

[ColeenD3]

You will divide the house according to square footage. Assume it is 50/50. 

The rental half can deduct half of all expenses. Income and expenses are deducted on Schedule E. You can also depreciate that half.

The personal half can deduct mortgage interest and property taxes. These are deducted on Schedule A if you itemize.

Where do I enter income and expenses from a rental property?

Note: If your rental property is located out-of-state, make sure you first set up that state properly in Personal Info. That way, when you do your state taxes, we'll be ready to go.

To enter your rental:

1. In TurboTax, search for rentals and select the Jump to link at the top of the search results.
2. Answer Yes to the question Did you have any rental or royalty income and expenses in 2021 for property you own?
3. Follow the on-screen instructions as you proceed through the rental and royalties section.
   • We'll ask you to enter general information about your rental (like description, address, and ownership percentage).
   • Eventually, you'll come to the Rental Summary screen, which is where you enter your rental income and expenses, assets and depreciation, and vehicle expenses.

Tip: Rent is considered income in the year you received it, not the year it applies to. This means that a rent payment for the month of January 2022 collected in December 2021 is reported on your 2021 return.

If you're also filing a nonresident state return to report income from an out-of-state rental property, be sure to complete your nonresident state return before you prepare your resident state return when you get to the State Taxes section.

You can enter up to 45 rental properties in TurboTax.

[ssf-gm]

If I split the property 50/50, does that mean I can only deduct half the mortgage interest and property taxes on my personal return then?

The other half would all fall under rental expenses on Schedule E?

What happens when I sell?

Can I again only claim 50% of capital gain as tax free as a primary residence?

And where do I put the expenses I undertook for the renovation of the property?

Again 50/50?

[Vanessa A]

Yes, so if you have a half double and rent out one side while living in the other side, you would deduct 50% of the mortgage interest and property taxes and the other 50% on Schedule E. 

Depending on the type of renovations you do, you would either expense them or add them to the cost basis of the property.   You would allocate the cost based on the part of the property renovated. Example, if it was a half double and you renovated the rental side but not your side, the money spent on the rental side would all be allocated to that side.  If you did something like granite counters on your side, then that would be strictly personal. 

When you sell, yes, you could only claim 50% as your home, the other half would be sale of your rental property. 

[ssf-gm]

From other sources, I've been told that even renovating parts of the rental side count as a capital improvement if they are of a more permanent nature. Is that not the case? The work I did was a gut renovation, so what there should count as rental expenses?

[DianeW777]

If you placed this rental into service in 2021, add the capital improvements (your renovation) cost to your original cost of the home.  Then you will determine the rental use percentage based on square feet.  If the capital improvements were strictly for the rental unit portion, then create a new and separate asset for the renovations of 2021. The first asset would be the original purchase price.  Both should be depreciated using the 27.5 year or residential rental real estate selection.

You must determine the amount for land separately from the building.  Land is an appreciable asset and therefore is never allowed to be depreciated.

• The tax assessment statement usually separates land from buildings so that could be used. 
• Percentage allocation is one way to make a decision.  If your personality is aggressive, you may want to allocate 80% of the value to the building and 20% of the value to the land. If your personality is conservative, you may want to allocate 60% of the value to the building and 40% of the land. 
  • This percentage method should reflect a reasonable inference as to the land value, then you can proceed to complete your tax return.