Apologies in advance for the lengthy post.
On 1 January 2019 my wife and I owned our primary residence and a rental property a three hour drive from our primary residence. That is the last day I think I fully understood my real estate tax situation.
Sometime early January, the neighbor across the street from our primary residence let us know he was planning to move. My wife announced to me "I want to buy that house so my parents can live in it". I like my in-laws, so we made an offer the day the house went on the market in March and closed on it in April. We took out a mortgage to purchase the house initially, but when my in-laws sold their home and moved into the one across the street, they then gifted to us the proceeds from their house sale, which my wife and I used to pay off the mortgage of the new house 5 months later (September 2019).
Meanwhile, in June, our tenant in the rental property (purchased as a vacation home in 2007 - 6 months before the real estate market crashed - but converted to a rental property in 2013) decided to stop paying his rent. After relations between the tenant and the real estate company we hired to manage the property for us deteriorated, the real estate company recommended we start the eviction process. Court date was in early August and the house was returned to us mid August. At the time we took back possession, we let the real estate management company know that we were no longer interested in renting the house and instead wanted improve the house to a sellable condition and sell.
On Day 1 after repossession I changed the locks. I then hired a company to perform a home inspection and give me a report of everything wrong with the house so I would have a punch list of things to work on.
Upon seeing the report, my 22 y.o. son, at the time not employed and looking for something to do, asked if I would consider letting he and his friend (also 22 y.o. but with several years construction experience and at the time "between gigs") do many of the repairs. After looking at the list, we came to an agreement on the things they would fix (carpentry, painting, and yardwork mostly, as well as acting as my contact when dealing with other contractors) and the things I would hire outside contractors to do (such as a new roof, new flooring, electrical). I hired them as household employees and withheld taxes. My son and his friend moved into the house in early October (and lived there for free) and stayed until early January when the work was completed. The house was for sale by February 2020, we received an offer in March, and closed in early May.
After that lengthy background description, my question is...how should this have been filed when I completed my 2019 personal income tax?
I'm now fairly certain that my 2019 filing is incorrect and I will be filing an amended return once I've figured out what "correct" is. But this is how I filed:
1) Mortgage interest and property taxes for the primary residence went on Schedule A.
2) Using the date I changed the locks as the split, all income and expenses incurred on the rental property prior to the that date - including the locks - went on Schedule E. I believed the costs associated with restoring the property to a sellable condition, rather than being deductible anywhere, would instead add to the property's cost basis. Mortgage interest and property taxes were divided (on a pro rata basis) between the Schedule E and Schedule A. My thinking was that as my son lived there for the last three months of 2019, the property had returned to being a personal residence.
3) The mortgage interest and property taxes on the new inlaws house paid in 2019? Didnt include them on the return at all. Nada.
Now, after spending a little more time trying to understand it, I believe only 1) was done correctly. At a minimum property taxes on the inlaws house should have been included on Schedule A (but subject to the $10k limit). And probably the interest should have been as well if the rental property should have actually been treated as a rental property for the entire year.
Unless a a property located across the street from your primary residence cant be considered a second/vacation home, in which case both would go on a Schedule E, but without any income (the inlaws do not pay rent) both would be lost as deductions.
I'm lacking in clarity of what the proper way of handling 2) should have been. Should it have remained being classified as a rental property even though my son lived in it for 3 months?
