I purchased a home last year and rent out one third of the house. How do I set up depreciation on the portion I rent?

Forum|Forum|4 years ago
October 12, 2021
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I short term rental a portion of my house I just purchased. I rent the bottom floor as a short term rental and live on the second and third floor. 1/3 is rental and 2/3 is my personal residence. Do I need to depreciate this property and if so how do I set up in Turbotax?

TurboTax Self Employed Online

GeorgeDenseff

You will enter this under Income...Rentals, Royalties and Farm.

For the type of Rental, Select Other

Give the rental property a name like Third Floor Rental

Than follow the screens until you can pick Rented Part of Home
You will get to the question:

Since you rented part of your home, would you like us to automatically divide Third floor's expenses?
The easiest way is to put in the percentage of the home that is rented and let TurboTax do the math.

Enter your income and expenses for the rented portion of your home. For example if your home mortgage interest is 3,000 - enter 3,000 and TurboTax will divide it and enter $1000 for you rental expenses.

When you figure depreciation only put in the cost of the home. Do not include the land. Land does not depreciate.

Here is some rental property information from TurboTax.

Henry6Author

Thanks for the help. Your reply was spot on and I resolved the issue. Great assistance-thanks

SundayInSalem

Claiming depreciation is not an option. When you sell a property, the IRS requires you to add back depreciation "allowed or allowable," meaning you still have to claim depreciation on the sale even if you never claimed a deduction. The IRS says: " All allowed or allowable depreciation must be considered at the time of sale."

TurboTax will not automatically split your depreciation using the rental/personal percentage for expenses. You have to another step by either (1) only enter the rental portion of your house for depreciation or (2) entering the whole house as an asset and enter a rental percentage in that section.

Rental portion only

For example, suppose you paid $90,000 for your house, including $30,000 for land. In your case, enter 1/3 x $90,000 or $30,000 for the cost and 1/3 x $10,000 for the land. TurboTax will depreciate the rental portion of your property ($30,000 - $10,000 = $20,000) which is one third of the total house - less land.

On the rental property info screen – select Add expense or asset
Select Rental property
EDIT your rental property under Assets
Select Rental Real Estate Property
Choose Residential Rental Real Estate
On Tell Us About This Enter Asset, enter one-third (1/3) of the total cost and one-third of the land price. This will depreciation one-third of your property.

Business use percentage

Your second option is to enter the full amount for the house and enter the business percentage (33%). TurboTax will depreciate one third of the home.

On the rental property info screen – select Add expense or asset
Select Rental property
EDIT your rental property under Assets
Select Rental Real Estate Property
Choose Residential Rental Real Estate
On Tell Us About This Enter Asset, enter the total cost and total land price.
On Tell Us More About This Rental Asset enter 33.33% as your business use.

Enter option will produce the same depreciation within a few dollars.

Carl11_2

Employee

TurboTax will not automatically split your depreciation using the rental/personal percentage

Yes it will. As you start working through the Rental & Royalty Income section of the program, you'll come to screen titled, "Do any of these situations apply to this property?" On this screen you must make three selections.

- 2020 was the first year I rented this property.

- I rent out part of my home.

- I converted this property from personal use to a rental in 2020.

Then on the screen, "Let us calculate your rental deductions for you" select YES and then enter the percentage of floor space that is exclusive to the renter.

Next, you enter the property in the assets/depreciation section. When you get to the screen titled, "Tell us more about this rental asset" you will select "I purchased this asset new", and select "No I have not always used this item 100% of the time for this business" then select "I used this item for personal purposes before I started using it in this business".

On that same screen where it asks "Percentage of time I used this item for business in 2020", you enter *not the percentage of time*, but the percentage of floor space that is exclusive to the tenant. The percentage entered here should be the same percentage you entered earlier. Then enter the date that space was converted to rental use.

Now the one thing that will not be pro-rated by the program is the property insurance. I don't know why, but I can speculate. (Won't waste your time with that.) So you will need to pro-rate the property insurance yourself.

The simplest way is to first divide the amount by 12 to get the cost of insurance per month. Then multiply that result by the number of months. Finally, multiply that result by the percentage of floor space rented.

SundayInSalem

The specific question was "How do I set up depreciation on the portion I rent?"

As you correctly said, you have to manually enter the rental square footage percentage by yourself which is the second option Business use percentage above.

TurboTax does not automatically carry over the rental deduction percentage into “Percentage of time I used this item for this business in 2020 (e.g. 80%)."

Excellent point clarifying that percentage of time = rental square footage and that property insurance also requires a specific adjustment!