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I moved to a new home in July 2016 and decided to give my old home on rent. However there were certain things I needed to fix and so I finally put an ad on April 27, 2017 and got it rented out a month later. For 2016, I'm certain that I cannot recognize any expenses, but for 2017 how do I treat the following expenses:
1. Utilities - do I recognize everything from Jan to Apr?
2. Interest & Property taxes - do I pro-rate?
3. Repairs like fixing a plumbing leak that happened before Apr 27.
4. Lawn mowing and yard work pre-Apr 27
5. In Dec 2016 I replaced the carpet at a cost of 815. Do I add this to the basis of the house when depreciating?
6. Just before I moved out I refinanced the house to a 15 year loan. Do I expense the closing costs over 15 years and do I start in Apr 2017, Jan 2017 or July 2016?
7. Insurance was paid just before I rented it out? Do I include it or pro-rate?
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It is ***IMPORTANT*** that you work this through the program the way it is designed and intended to be used. That way, you will deal with everything in the Rental & Royalty Income (SCH E) section of the program first, and if you elect the correct option of letting the program do the splits for you, then the program will take care of pro-rating between SCH A and SCH E.
When do, do not be surprised if there's nothing on the SCH A. That's because until your SCH A itemized deductions exceed your standard deduction, the itemized deductions have absolutely no impact what-so-ever on your tax liability. Therefore until itemized deductions exceed the standard deduction, there is absolutely no need for the SCH A and it will not be generated.
As a first time landlord it is important that you get your numbers in the SCH E spot on perfect in that first year. Otherwise, the tiniest of mistakes will get exponentially bigger with each passing year. Then when you catch the mistake years down the road (if the IRS doesn't catch it first) the cost of fixing that mistake will be expensive. So perfection is not an option.... it's an absolute *must*. The below information will help clarify things for you.
Rental Property Dates & Numbers That Matter.
Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.
RENTAL POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property Improvement.
Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.
To be classified as a property improvement, two criteria must be met:
1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.
2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.
Cleaning & Maintenance
Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.
Repair
Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.
Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.
However, when you do something like convert the garage into a 3rd bedroom for example, making a 2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.
Thanks. What do I do about interest, taxes and insurance?
Just enter in the program, exactly what the program asks you for. *YOU* don't do anything about the interest and taxes, other than enter the amounts on the screen that will ask you for those amounts. The program takes care of the splits. This is why it is important to use the program the way it is designed and intended to be used, and to enter data in the order the program asks for it. More importantly, *ReAd ThE sMaLl PrInT* on every screen before making selections or entering data. The small print matters, big time.
One of the initial questions is did I convert the property to a rental in 2017. I feel that will change the type of follow up questions so what do I answer that? I moved out in 2016.
I don't know if you converted the property in 2017 or not. Either you did or you didn't.
Also, since you're using the desktop version of TurboTax, the tax file is saved in your documents/turbotax directory on your hard drive and has a filename extension that ends with .tax2017. So answer the questions and work it through. If you mess things up really bad, it's easy to start over from scratch. Just close the program, delete the .tax2017 file then open the program and start over.
Just understand this. Since rental income is passive, that makes rental expenses passive also. Therefore your rental expenses can only be deducted from rental income. So if you did not have the house rented out in 2017, don't bother converting it in 2017. With no rental income for 2017, your rental expenses incurred in 2017 will not be allowed and you will see "NO" tax benefit at all.
It is HIGHLY uncommon for rental property with a mortgage on it to "EVER" show a profit "on paper", unless you're renting it out for about three times what the mortgage payments are. Basically, depreciation and other deductions more commonly offset the taxability of the rental income, and the excess deductions are just carried over to the next year. So as the years pass, your carry overs just increase with each passing year.
Then in the year you sell the rental property, that's when you get to "realize" all those carry over deductions and they can offset the taxability of the depreciation recapture quite a bit, if not completely.
So quit trying to 'read between the lines" what is not there. Work through the program, answer the questions and get it done.
Very helpful--thank you!
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