Tax Law (Questions About Taxes)/Rental of Primary Residence for a one-year Sabbatical
QUESTION: Hi -
I am a professor on sabbatical out of state - during the time I am gone (June 2012-Dec 2012 for this tax year, Jan 2013-May 2013 for next year) I have rented our home. This is making for a messier-than-normal tax return, and I'm having fun trying to figure out what is deductible and what is expense. I think I have this correct, but I'd like confirmation.
False numbers here, but just to see if I'm getting this correct:
Mortgage interest paid to bank, per their 1098: $12000
Months in residence of home: 5
Months home occupied by tenants: 7
Months in residence out of state: 7
Rent paid by tenants: $6000
Days at fair rent: 215
Personal use: 0 (since the property is occupied by the tenants for the entirety of the time the property is a rental property in 2012)
In my schedule E form, then, I believe I should have an entry for
$6000 paid by the tenants in rent as rent income, and $7000 in
expenses, the 7/12 of the $12000 paid by me in mortgage interest.
I have no other income/expenses because per terms of the lease the tenants are responsible for all utilities. (Have I got that right?)
Thus my net rental income - expenses, assuming I had no maintenance costs, etc., would be -$1000.
Then in my itemized deductions, I should deduct not $12000, but $12000 less the $7000, that is, the $5000 of mortgage interest that should be allocated to the time we were actually living in our home. Does it matter that my bank's 1098 statement lists only the $12000 figure as mortgage interest paid? I assume, then, that in line 12 of schedule E I'd have $7000 listed, and on line 10 of schedule A I should have $5000 listed. Is this correct? Please help - this is quite unclear.
Thanks for your question. I'm on a one-semester sabbatical, but its simpler than yours. I'm staying home.
Some clarifications and suggestions.
1. You need to list 151 personal-use days as the total must equal 366 days. As I understand it, you did live in the house 151 days during the year.
2. Allocating the interest between Schedules A and E is correct, but to avoid IRS nit-picking allocate it based on days, not months.
3. You can also include a portion of the property taxes and homeowner's insurance. If you have homeowners association fees, security systems, or other such items, they can also be allocated.
4. You need to take a deduction for depreciation. The basis for depreciation is the fair market value of the house at the time it was placed into service (minus land value) or your purchase basis, whichever is less. If you don't take depreciation the IRS reduced your basis anyway so take it.
5. When you sell the house, you will need to do a depreciation recapture and allocate the gain between the rental period and the period it was your primary residence. But those are issues for later, and take some time to explain.
Hope this helps.
John Stancil, CPA
---------- FOLLOW-UP ----------
QUESTION: Hi John -
Thanks for your help.
The reason I didn't think I should include the 151 days in my initial assessment is that the instructions for Form E say "do not include as personal use days any days before or after you start renting the property". That made no sense to me, but I assumed I had read those instructions correctly. I guess I didn't.
Is the portion of homeowner's insurance that can be deducted allocated the same way?
Normally as I understand it home-owner's insurance is not a deductible expense in your primary residence, but I gather from what you say that, if I paid 1000 in homeowner's insurance during calendar year 2012, I should be able to add a deduction of (215/366)*1000 or 587.32 on line 9 of schedule E?
Property taxes, though, if I understand you correctly, would need to be split? (215/366) of it going in line 16 of schedule E, and 151/366 of it going in line 6 of schedule A?
I've never thought about depreciating the home value, so I'd better read up on that. I have the tax statement from our county, and I assume from there I can find the assessed value (buildings only). Then is the depreciation figured as assessed value * (days rented / 27.5 years) since (if i am not mistaken) 27.5 years is the depreciation period for a residence?
Thanks again for your help,
I wasn't thinking clearly on the days. Just leave it as you have it. I usually deal with long term rentals, and didn't think through that part. I apologize.
Use the 215/366 allocation for all the items I discussed. Obviously, things like HO insurance don't go to Schedule A.
Don't use the tax assessment - they do not normally reflect FMV. I would use Zillow, you can back it up to their valuation for any date.
The depreciation period is 27.5 years, but use the depreciation tables. Depreciation is for a full month. So just go to the table and take the fraction given for the month placed into service.
Hope this helps.
John Stancil, CPA