Updating rental percentage

[Roseleena]

I've been living in a home I own where I rented out a portion of the property, about 20% of the space, for several years. I have just completed construction on a new home that I plan to move to, and I need to convert my current residence to a 100% rental property.

How do I track this transition appropriately for depreciation and expense tracking purposes?

[CatherineR]

Roseleena  thank you for participating in our Ask The Experts day!

  Turbo tax can handle the change in % use of your rental.  Here is a resource that discusses the steps involved:

 Change in % use of rental property  

  Once you enter the effective date of the change in % the program will properly calculate the depreciation (the cost basis does not need to be changed).  You will have to keep track of expenses prior and subsequent to the % change so the allocations of expenses will be correct.  Best wishes on the move to your new home!

[lramkumar]

Hello Roseleena!

Assuming that you have checked that your rental was only part time in all those years,  this year you will change that and add the number of days it was rented and your personal days.  The program will automatically calculate that.  Here are a few examples: 

If the property is ***NOT*** classified as a rental for the entire tax year, then things are different. For example, if it's classified as a rental from Jan 1 thru Jun 30, and there is no personal use during that time, then the business use percentage is ONE HUNDRED PERCENT. You only enter expenses incurrred during that time and those expenses are ONE HUNDRED PERCENT deductible as rental expenses.

For this scenario, you have 182 business use days and ZERO days of personal use.

Note also that you can not "change" the percentage year to year. Now there's two types of percentages that I see that can happen:

 - Percentage of floor space that is exclusive to the renter.  This is most commonly used when you are renting out a part of your primary residence. This percentage can not just be arbitrarily changed each year. Changing it year to year will completely screw up the depreciation history and put you in what I refer to as "tax hell" when either you sell the property, or the IRS audits you.

 - Percentage of time rented. This is most commonly used when you have a property where 100% of the space is rented out for part of the year. If rented out for several months, and then used for personal use the rest of the time, it's best to "declare" this property as a full rental for the entire year. Then when asked, you will report the number of days rented and the number of days of personal use. Those particular numbers *can* change every year. The program will then pro-rate your expenses between SCH E for the number of days rented, and SCH A for the number of days of personal use.

Now "personal use days" is not necessarily the number of days you actually lived in the property either. It's typically the number of days that the property was flat out "not available for rent", weather you were living in it or not.  The number of days rented and days of personal use can be less than 365 days, but it can't be more than that.

The one thing the program will not pro-rate for you, is the property insurance. This is because property insurance is not deductible on the SCH A and never has been. Therefore, you may need to pro-rate the SCH E insurance costs manually yourself, and enter it.

In some situations the program will prorate the property taxes and mortgage interest for SCH E, but will not place the difference on the SCH A. Therefore, you should always check that once the return is completed in it's entirety (and not before) to ensure the SCH A prorated amounts are there. 

Take note that if the total of your SCH A deductions do not exceed your standard deduction, then it won't matter if the pro-rated amounts are there or not, since it would be more beneficial to take the standard deduction instead of itemizing.

Thank you!