Schdule E: Converting long term rental to personal not count?

Question

From the instructions for Schedule E, was confused about this line:

Do not count as personal use:
• Any day you spent working substantially full time repairing and maintaining the unit, even if family members
used it for recreational purposes on that
day, or
• Any days you used the unit as your
main home before or after renting it or
offering it for rent, if you rented or tried
to rent it for at least 12 consecutive
months (or for a period of less than 12
consecutive months at the end of which
you sold or exchanged it).

So, does that mean that if I am converting a long term rental to personal use in Q4 of this year, does that mean that for intents and purposes I get to treat it like it was a rental all year for expenses and CapEx and I should leave the personal use days box blank?

Eamonn McElroy · Answer

As long as the rental period is qualified, your deemed personal use days after the rental ends will be zero.

See IRC Sec 280A(d)(4).

If you have personal use days inside of the qualified rental period, or if the rental period is not qualified, things get complicated and it is advisable to consult your tax professional.

David M. · Answer

@Eamonn McElroy

Yes, leave it to the pro to explain it clearly.

Michael Plaks · Answer

@Michael Zagorsky

Forget the conversion for a moment. Let's say this is just a rental all year. If you happened to use it for 5 days for your family, then you have 5 personal days and 360 rental days. This does not create any tax problems, because of too few personal days to matter.

If, however, you used it as your summer house for 2 months, now you have 60 personal days and 305 rental days. This does create a tax problem, and you have to deal with complex "vacation home" rules that @Ashish Acharya mentioned.

You happened to quote a section of the IRS publication that attempts to clarify what exactly counts as those 5 or 60 days in my examples. But since it's the IRS trying to explain things, the result is the opposite.

This is what the IRS tried to say. If you converted this property to personal after renting it for awhile, that whole game of counting personal v. rental days is over. It only matters for the first 9 months it was a rental. For those months you still have to count personal v. rental days.

But once it's converted, none of it matters. It is now a 100% personal property, and you no longer need to count days. What you need to do instead is allocate expenses between the 9 months of rental use and the 3 months of personal use.

For the 9 rental months, you deduct all expenses and depreciation on Schedule E. For the last 3 months, you can only deduct a prorated portion of mortgage interest and property taxes, and only on Schedule A if you itemize deductions. Otherwise, that portion of interest and taxes is "wasted" for tax purposes. You cannot sneak it onto Schedule E.

Ashish Acharya · Answer

You actually need to know another area of code to understand this. Usually, if you have personal use on home, then you are subject to the vacation home and a bunch of other rules. That instructions line comes into play when your property is not a vacation rental but has personal use but just happens to be used as a personal home before converting it to rental.

Eamonn McElroy · Answer

@David M.

What you're describing, that's not exactly how it works, but it was a good stab for a non-practitioner.

David M. · Answer

@Michael Zagorsky

I didn't look up the context of the instructions, but I think i know what it means and what is confusing you.

First, you need to determine if the property is in service as a rental investment property.  So, if you are converting it to a primary residence / personal use in Q4, it was only in service for 9 months of the year.  Meanwhile, if you did NOT follow the instructions that you bolded, one would have counted 90 days of personal use.  Well, that's basically double counting.  You don't count those days "before or after renting it or OFFERING for rent" (i.e. its talking about the period that its in service).

Does that make any sense?  I'm not sure if I'm explaining it well in writing.  If not, perhaps one of the accountants here on BP can explain it better.  Good luck.

Schdule E: Converting long term rental to personal not count?

Most Popular Reply