Expenses for Partial Year Rental Property

bknaus
bknaus Member Posts: 1 Newcomer
in Income

In 2024, I had a property that we lived in for January and February, then rented out starting 3/1/2024 through the end of the year. Thus, I figured I had 60 days of personal use of the property and 306 days of rental use, about 83.6% rental use.

My question concerns the allocation of expenses for the rental property between personal use and rental use. I noticed that FreeTaxUSA says that it will allocate several rental expense categories between personal and rental use based on that rental use percentage: cleaning & maintenance, insurance, mortgage interest paid to banks, repairs, supplies, real estate taxes, utilities, and other interest paid.

For example, I am wondering about necessary repairs that were performed later in 2024 while the house was being rented. I'm thinking these expenses shouldn't be prorated at all, since they were incurred entirely while the house was a rental. If I wanted the software to account for the full amount of those repairs, what would be the best way to go about that?

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Answers

  • KristineS
    KristineS FreeTaxUSA Agent Posts: 276 image

    Hi bknaus,

    Once the property was converted to rental use, all expenses were 100% deductible. So you would just enter these expenses at 100% during the rental period. See Publication 527 for more details.

    Up until that point, any improvements of lasting value became part of the basis from which depreciation began when you started renting 3/1/2024. Repairs you made simply keep the house in good working order and don't increase basis.

    In FreeTaxUSA software you also have the option of indicating 100% business use for the time of rental and then manually applying 83.6% to the appropriate expenses for the time period and entering each of those costs. You may then enter 100% for the cost of repairs during the rental. If some costs overlap or apply to the same category, it'll be the 100% added to the 83.6% portion for one number entered in the associated expense.

  • Andyman
    Andyman Member Posts: 1 Newcomer

    bjnaus, I have the same question and the response above is honestly missing information.

    https://www.irs.gov/pub/irs-pdf/p527.pdf indicates the following:

    "Line 2d. Enter the total of your rental expenses that are directly related only to the rental activity. These include interest on loans used forrental activities other than to buy, build, or improve the dwelling unit. Also, include rental agency fees, advertising, officesupplies, and depreciation on office equipment used in your rental activity."

    The only method I can see is to total direct rental expenses and place this value under FreeTaxUSA's "commissions" field.

    Is there another more logical method to indicate expenses are directly related only to rental activity?

  • Henry
    Henry FreeTaxUSA Agent Posts: 134 image
    Hi Andyman, if you lived in the property for a couple months and then rented it out for the rest of the year, you should answer the questions in the rental/Schedule E section of the software based only on the period after it was placed in service as a rental.

    When claiming the property as a depreciable asset, enter the date it was placed in service and indicate 100% business use. The question about personal use refers only to the time after conversion to rental -- for example, bknaus would select "yes" ONLY if they used the property personally after 3/1/2024.

    Your understanding is correct. IRS Publication 527 does distinguish between "direct rental expenses" — those incurred solely because of the rental activity — and expenses that must be allocated between personal and rental use.

    It will be up to you to determine which expenses are direct rental expenses and which need to be allocated.
    -For direct rental expenses, enter the full amount. For example, $200 carpet cleaning for a tenant goes entirely on Schedule E and can be entered in the cleaning and maintenance field.
    -For allocated expenses, prorate based on rental days. For example, divide annual real estate taxes by 365, then multiply by rental days to get the rental portion. Enter the rental portion in the Real Estate Taxes field.

    If you haven't indicated that there was personal use of the property after it was placed in service as a rental, then the amounts you enter will be applied directly to Schedule E without further prorating being done by the software.

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