Renting a new home after a period of personal use.

[smilgrom79]

I closed on a new house on 2/28/22, and lived there through 6/30/22.  I tried to find a tenant for July 2022 through June 2023, but ended up renting it from 7/28/22 - 5/31/23.  The house will be listed and available for rent for June of 2023, and I will move back in on 7/1/23.  What expenses can I deduct in 2022? 2023?  Do I allocate expenses to the personal use period and rental period based days of each type of use? How do I treat vacancies?  Thank you!

[Vanessa A]

Yes, you will allocate expenses based on the days of each type of use.  As you walk through TurboTax, it will ask you when you purchased the property, if you converted it from personal use to a rental property, how much you paid, how many days you rented it out, and how many days you lived in it.  Then TurboTax will do the allocation based on the days you live there vs rented. 

You will claim the expenses and income for the property on your 2022 taxes for July 28 through December 31.  

From July 1st to July 28th, you can only deduct expenses if the property was available and ready for renting. Meaning if the property was available for the tenant to move in on July 1st, you may be able to deduct carrying costs such as utilities. If the property was not ready for the tenant on July 1st, the expenses incurred during that period of time would not be deductible rental expenses. 

 You cannot claim any of the expenses during the time you lived there.  

However, if you made improvements to the house during the time you lived there, like putting on a new roof, new cabinets, etc., you will include that in the cost basis of your house to depreciate during the rental period. 

The same will apply for 2023.  While you are living there, no part of the cost will be deductible. 

This link will give you more detail on what you can and cannot add to your cost basis. 

[smilgrom79]

Thank you very much!  To make sure I understand you correctly, for presently deductible items such as repairs and maintenance and utilities (as opposed to items of depreciation), it does not matter when the expense occurs.  All such expenses for the year are added up and the total is multiplied by the ratio of rental/available for rent days to total use days.  Is that correct?  Thanks again.

[Vanessa A]

 When you start as personal use then convert to a rental, you will not count your expenses prior to the time the property was available for rent.  If you use the property for personal use while it is a rental property, then the expenses are allocated.  

For example.  You did a month to month lease with your tenant, they rent it from January to May.  You then move in from May to June, then rent it again from July to December.  In this scenario you would include all of your expenses as you are using your rental property for personal use.  

However, in your situation, you would not include the time prior to renting the property as personal use and therefore would not include the expenses for that period of time.  You would only include the expenses for the time it was considered a rental property.

The same will apply if you convert it back to personal use.  You will include the expenses for only the time that it is a rental property.  If you use it for personal use prior to converting it back, you will then need to enter the number of days it was used for personal use and the expenses during that period.  TurboTax will then allocate accordingly.  

Basically, the expenses are allocated during mixed use periods, but not before or after fully converting. 

@smilgrom79 

(Edited 1/12/2023 @3:49PM PST)

[smilgrom79]

Very helpful, thank you again!

(As an aside, these IRS rules seem to be another example of inconsistent implementation of the underlying tax policy.  If I rent from 1/1/22-12/31/22, then none of the repairs I do before or after the rental period are deductible. If, however, I instead rent from 7/1/22-6/30/23, then at least half of such expenses would be deductible.  Also, there could be a large discrepancy in the cleaning and utility expenses during the rental period and the personal use period if one set of occupants is a family of 5 and the other set is a tidy couple, but the allowable deduction is based on the average daily expense for the year. Also, repairs and maintenance expenses made after the tenants move out would not benefit the renters, so why should any of it be deductible in that year?)

[Vanessa A]

 The distribution of expenses may result in the expenses not being allocated based on how they were incurred when the property is used for both rental and personal purposes. 

Topic No. 415 Renting Residential and Vacation Property states "If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose."

@smilgrom79 

(Edited 1/12/2023 @ 3:53PM)

[smilgrom79]

Thanks.  It is a fairly complicated flow chart.  I took a look at pub. 527.  If I move back into my house after 11 months instead of 12, then I would count the days before and after the tenancy as personal use days.  In both 2022 and 2023, my personal use days would exceed the greater of 14 days or 10% of the rental use days.  So my dwelling unit would be considered a home.

I am not sure, however, that this would make any difference to which method I must use to determine what part of my expenses are deductble, based on the ratio of days of rental use to total days of use, or based onit when the expenses were incurred.  I also think that in both cases, the total deductions would be limited to gross income subject to the PAL rules, with excess carried forward.

Looking at  the special circumstance in chapter 4 of pub 527:

If you change your home or other property to rental use at any time other than the
beginning of your tax year, you must divide yearly expenses, such as taxes and insurance,
between rental use and personal use. You can deduct as rental expenses only the
part of the expense that is for the part of theyear the property was used or held for rental
purposes.

I think that is the case whether or not the dwelling unit is considered a home.  They give the following example:

 "You moved from your home in May and started renting it out on June 1. You can deduct
as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance.
Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities."

What about expenses, like repairs, that are neither billed annually, nor monthly?  If I make necessary repairs before the tenant moves in, can I deduct some of that expense using the days of use allocation method? 

In 2023, the my house will start the year in rental use, so I would think the special rule above would be inapplicable and I would allocate all expenses according to days of personal v. rental use. Or is the allocation method only used in the special case where someone rents out a dwelling unit year after year, with some personal use days mixed in along the way?

Sorry to turn this question into a dissertation.  Thank you for any advice!!

[RobertB4444]

The most important words in the rules about rental property are 'available for rent.'  The day your house went on the market looking for a renter and was move in ready is the day that it officially became a rental property and stopped being your residence.  Expenses before that date were improvements to your residence and not deductible.  Expenses after that date are work on your rental property and fully deductible.

The same goes for utility bills and the like.  That's why your insurance is prorated.  While it's true that you wouldn't have made the repairs to your residence if you weren't going to rent it it is equally true that the repairs prior to the house being available for rent increased the value of the home.  So those repairs are added to the value of the house for purposes of depreciation and not expensed.

For people who want to have a rent home for the entire year the 14 days of personal use rule is in effect.  If you use it as a personal residence for more than 14 days you have to allocate expenses.  Which you are already doing and which TurboTax will absolutely be able to calculate for you.

@smilgrom79

[smilgrom79]

So if a window is smashed while you are living there, cover it up with cardboard and wait until the tenant moves in to repair it.  😀

Seriously though, if the house is full rental use from Jan through May, then I move back in but over the next six months I rent it out for a total of 30 days, can I treat it as mixed use property and allocate my repairs (not cap. Improvmts.) based of rental use days to total use days?

I think the dwelling unit would be a home given personal use exceeds 10% of rental use. So there would be addtl. Limits on carry forward losses, but I could do some interior repairs while living there and allocate some of that expense as a deduction on sched. E.  With the $2500 deminimus safe Harbor, that could result in big tax savings.  Turbo tax can’t use other inputs to chose between type-of-use-ratio allocation and rental-period allocation, can it?  Is there a place to enter all the different dates during the year the house was rented or available for rent?

[RobertB4444]

TurboTax allocates as a percentage using the number of days available for rent during the year vs the number of days it was a personal residence.  So it allocates based on totals.  Moving in and out repeatedly doesn't effect that.  If you want to take a position that is different than the standard then I suggest consulting a tax expert in your area and seeing what they say about the details related to your situation.  

@smilgrom79