How to convert a residential rental property that was never a vacation home into a second home, incl. proper security deposit and expense allocations?

[KingFisher100]

We rented out our condo for more than 10 years, starting shortly after its purchase.  It has never been used as a “vacation home” but instead 100% as an income producing rental property.  Our final tenant left at the end of February 2023. That tenant caused a lot of damage. We retained most of the security deposit to cover the damage, but it took a couple of months after the tenant left to complete the repairs. Due to the damage and adverse changes in rent control laws, we ended up deciding not to rent the condo again, but instead will use it as a second home.

Several questions:

1. What date would be the appropriate date to convert the unit to personal use (March 1, 2023, or July 1, 2023, the date on which the repairs were completed)?
2. If we are required to convert the unit to personal use on the earlier date (March 1), is there a way to ensure that the expenses that were paid for using the security deposit (which the IRS appears to consider to be rent) can still be included on Schedule E to offset that “rent”, even if the service providers were not paid until after March 1?
3. Since this unit is being permanently converted to “personal use” as a home (and not a main home), for purposes of Part I, item 2 of Schedule E, should we indicate that there are 60 rental days and zero (0) personal days, and then include in our Schedule E expense entries only expenses (such as monthly HOA fee, repairs, pro-rated months of insurance, pro-rated months of property taxes) applicable to the period prior to the conversion date and exclude all expenses after the conversion date? 
4. Would we then include property taxes for subsequent months in the Schedule A itemized deduction calculation, with other formerly rental expense items no longer being deductions for periods after the conversion date? (We don't have a mortgage.)

5.  NOTE:  The approach in items 3 & 4 is based on guidance in TurboTax discussion entitled “Schedule E for a partial-year rental property: how to force TurboTax to allocate 100% of expenses to rental (and none to personal use)” located at https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/schedule-e-for-a-part....   Would like to confirm that the ultimate response allowing manual allocation of entries between Schedule E and Schedule A is still valid.

[Carl]

1. What date would be the appropriate date to convert the unit to personal use (March 1, 2023, or July 1, 2023, the date on which the repairs were completed)?

Since you did not rent or attempt to rent it out after the last tenant moved out, Your date of conversion would be one day after the last renter moved out.

2. If we are required to convert the unit to personal use on the earlier date (March 1), is there a way to ensure that the expenses that were paid for using the security deposit (which the IRS appears to consider to be rent) can still be included on Schedule E to offset that “rent”, even if the service providers were not paid until after March 1?

Because you did not rent or attempt to rent after the last renter moved out, any repair expenses incurred after that last renter moved out, are not deductible on the SCH E, or anywhere else on the tax return.
3. Since this unit is being permanently converted to “personal use” as a home (and not a main home), for purposes of Part I, item 2 of Schedule E, should we indicate that there are 60 rental days and zero (0) personal days, and then include in our Schedule E expense entries only expenses (such as monthly HOA fee, repairs, pro-rated months of insurance, pro-rated months of property taxes) applicable to the period prior to the conversion date and exclude all expenses after the conversion date? 

Any expenses incurred after the last renter moved out are not deductible. Don't get confused here. If the expense was "INCURRED" before the last renter moved out, it doesn't matter when you pay it. It's deductible on SCH E. For example, if you received the electric bill on 1 Mar. for the period of Feb (when the renter was still there) that *IS* a deductible expense on SCH E regardless of when you actually paid it.

4. Would we then include property taxes for subsequent months in the Schedule A itemized deduction calculation, with other formerly rental expense items no longer being deductions for periods after the conversion date? (We don't have a mortgage.)

Basically, 2/12 of your property taxes paid in 2023 would be a SCH E decuction, and the remaining 10/12 would be a SCH A itemized deduction. Also, 2/12 of the mortgage interest paid in 2023 would be a SCH E deduction and the ramaining 10/12 would be a SCH A itemized deduction. (I just put that out there, even though you don't have a mortgage.) HOWEVER, 2/12 of the insurance premium you paid in 2023 would be a SCH E deduction and the remaining 10/12 would not be deductible anywhere on your tax return.

5.  NOTE:  The approach in items 3 & 4 is based on guidance in TurboTax discussion entitled “Schedule E for a partial-year rental property: how to force TurboTax to allocate 100% of expenses to rental (and none to personal use)” located at https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/schedule-e-for-a-part....   Would like to confirm that the ultimate response allowing manual allocation of entries between Schedule E and Schedule A is still valid.

For your specific and explicit situation, you will only be splitting the property taxes between SCH E and SCH A. You would be prorating the insurance for SCH E only, since insurance is not an allowed SCH A itemized deduction.
Since any repair expenses were not incurred until after the renter moved out, none of those can be claimed. But don't confuse repair expenses with property improvements. There is a difference. But in your case, any property improvements you may have done after the last renter moved out are not reported on your tax return and don't come into play until one of three things happens on your life.

1) You convert the property back to a rental or other business use.

2) You sell the property.

3) You die.

[Carl]

Also, you "MUST" work through each individual asset listed in the Assets/Depreciation section and show that you stopped using each asset with a stop date of one day after the last renter moved out.

Now, once you have completed your tax return, filed it, "AND" it has been accepted by the IRS, it it extremely important that you save a copy of your "ENTIRE" tax return in PDF format, and print it out. For your printouts you will "NEED" the following forms.

 - IRS Form 4562. There are two of these that both print in landscape format. One is titled "Depreciation and Amortization Report" and the other is "Alternative Minimum Tax (AMT) Depreciation".

 - IRS Form 8582 - Passive Activity Loss Limitations.  It's possible this form will not be present. If it's not present, that just indicates you have no carry over losses to deal with. But if you do have it, print it.

You need to keep all of the above forms, as you will need them when any one of the three aforementioned events occurs in your life. (Events are in my prior post in this thread.)

[KingFisher100]

Thank you, Carl.