Does turbotax do the math for expenses, if I rented a home for part of the year

Forum|Forum|2 years ago
March 30, 2024
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I started renting out my home mid May last year and made that clear by putting Days Rented as the right number of days (226). I marked personal use days as 0 as we were living there longer than a year before that.

When I enter expenses, it seems like Turbotax isn't automatically doing the math to only deduct (226/365) of the mortgage interest for example. Is it on me to do this math myself? I can, but just want to make sure.

It does seem like it does the math for depreciation though because I specified the date I started using it as a business 100% of the time.

It's a bit odd it isn't doing the math for other expenses but I wanted to confirm.

mglauner

If you started renting your home in May 2023, and entered that date as 'Date Placed in Service', when asked later 'if the home was rented all year', say YES, as it is referring to 'all year from the date available to rent.'

In other words, there was no personal use after the 'date placed in service'.

TurboTax will calculate a 'Business Use %' based on the May date, and apply that to the 2023 expenses, unless you change that for any particular expense. You can see that on Schedule E.

If you use TurboTax Desktop, in Forms mode, on Schedule E, you can indicate a Business Use % and TurboTax will calculate accordingly. Otherwise, the default is 100% rental expense.

@vinodr777

Carl11_2

Turbotax will only do "some" (actually very little) of the math "if" (and only if) you select the option to have the program do it for you. I do not recommend you let the program do it for you. I recommend you do it yourself.If you elect to have the program do it for you, they only thing it can "correctly" figure automatically is mortgage interest and property taxes. It can not and does not pro-rate the property insurance. This is because the insurance for the portion of time it was personal use is not deductible anywhere on your tax return. So I suggest you elect to "do the math" yourself. If the property will be a rental for years to come, you only need to do this the first year you placed the property in service. So select the option to do it yourself that first year.

- The program (not you) will figure the first year depreciation automatically, regardless of what you chose, based on the date you placed the property in service.

- You manually figure the interest deduction yourself based on how many days out of 365 days the property was in service. The difference is a SCH A itemized deduction.

- You manually figure the property taxes deductible on SCH E the same way you figured interest deduction on SCH E. The difference is a SCH A itemized deduction.

- YOu manually figure your property insurance deduction same way as above. However, the difference is "not" deductible on SCH A or anywhere else on your tax return.

For all other rental expenses, you claim the full amount incurred starting from the date the property was placed in service, until the end of the year. There is no pro-rating these expenses. So if you paid $100 a month for yard care that's $1200 a year. If you placed the property in service on Jun 1st, then you can only claim your costs for the last 7 months of the year, or $700 in this example.

vinodr777Author

Thanks @Carl11_2 .

Yes this is what I figured I would have to do as well. This is super clear to me. Thank you.

One quick follow-up. For the Schedule A itemized deduction, once I add the remaining interest portion I end up getting limited by the mortgage interest rules.... "You can deduct the mortgage interest you paid on up to $750,000 in loans for your first or second home".

What mortgage balance should I use when I calculate the average for the mortgage of the rental home. I am pretty sure I will be under the $750,000 across my homes if the average mortgage balance for this rental home will also factor in the fractional number of days of it being a primary residence, but I want to make sure I do that math properly as well and enter the right remaining mortgage principal balance in the schedule A portion.

Carl11_2

What mortgage balance should I use when I calculate the average for the mortgage of the rental home.

Hiere's my take on it. Hopefully someone else can cite some ruling and prove me wrong.

You still have to use the original mortgage balance. That's because it was in fact, 100% personal use before you converted it to a rental, and the interest paid before it was a rental was on 100% of the outstanding mortgage balance. Before you converted it to a rental, all of that outstanding mortgage balance was subject to the $750K limitation. After you converted to a rental, none of the outstanding balance was subject to any limits.

Example: (I'm using extremely inaccurate and rough numbers here for simplicity)

On Jan 1 2023 you have a $1,000,000 outstanding mortgage balance. Your interest rate is 10% or $8,333 in interest per month.

On July 1st you converted the property to a rental and placed it in service.

For the first six months (Jan-Jun) you paid $8,333 each month in interest for a total of $10,000 in interest.

You can only claim interest paid on 75% of the balance, or $750,000. Therefore, 75% of your $10K in interest is $7,500 and that's the limit of your interest deduction on the SCH A for the first 6 months of the year.

For the 2nd six months (Jul-Dec) you paid $10,000 in interest and it's all deductible on SCH E for the period of time it was a rental, which is basically business use property. So there is no limitations there.

Again, the above is using extremely rough (but somewhat close) numbers with some very simplified (and inaccurate) math. As you know, with each monthly payment the amount of that payment applied to the principle increases while the amount applied to the interest payment decreases.