Handling a future rental that is a primary for next 12 months

Member since 2022 · 7 posts · 3 votes

Hi! Looking for recommendations on bookkeeping/account management for a single family home. We are closing on it on Dec 21st and will live in it for a year, then rent it out as a long term rental. Are any of the repairs, purchase price, mortgage payments, etc considered business expenses or should they all be kept under our personal checking account? (We are just starting to get good at bookkeeping for our properties so I want to continue that trend)

Thanks!

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Ricky A.Pro Member

Rental Property Investor · Chapel Hill, NC · Member since 2014 · 135 posts · 112 votes

I'm not a CPA, so definitely seek more qualified advice, but my understanding is this:

- Purchase price (plus certain closing costs) will create your initial basis in the property. The basis is needed to calculate depreciation once you convert to rental. So keep a copy of your settlement statement, so your CPA can accurately calculate this.

- Minor repairs will not be deductible while it's your primary residence, but will be deductible once you've converted to a rental. You can consider postponing any minor repairs that you can (assuming they don't create more expensive repairs later). Major repairs/renovations, however, could add to your basis, so get advice from your CPA and keep records.

- Once you convert to a rental, the interest portion of your mortgage payment will be deductible. Also keep track of annual payments like property taxes, as a prorated amount may be deductible based on when the property goes into service as a rental. [Note, this is from the business perspective...some of these items may still be deductible on personal taxes if you itemize]. Side note, when you convert to a rental, you'll also want to replace your homeowners insurance policy to a landlord policy.

- I assume the rental will be reported on your personal taxes via Schedule E. If so, you don't have to have a separate bank account (since the rental is not in another entity's name). However, when you convert to a rental, you may want to use a separate account just because it will make bookkeeping easier.

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Ricky A.Pro Member
Rental Property Investor · Chapel Hill, NC · Member since 2014 · 135 posts · 112 votes
3y
I'm not a CPA, so definitely seek more qualified advice, but my understanding is this:

- Purchase price (plus certain closing costs) will create your initial basis in the property. The basis is needed to calculate depreciation once you convert to rental. So keep a copy of your settlement statement, so your CPA can accurately calculate this.

- Minor repairs will not be deductible while it's your primary residence, but will be deductible once you've converted to a rental. You can consider postponing any minor repairs that you can (assuming they don't create more expensive repairs later). Major repairs/renovations, however, could add to your basis, so get advice from your CPA and keep records.

- Once you convert to a rental, the interest portion of your mortgage payment will be deductible. Also keep track of annual payments like property taxes, as a prorated amount may be deductible based on when the property goes into service as a rental. [Note, this is from the business perspective...some of these items may still be deductible on personal taxes if you itemize]. Side note, when you convert to a rental, you'll also want to replace your homeowners insurance policy to a landlord policy.
- I assume the rental will be reported on your personal taxes via Schedule E. If so, you don't have to have a separate bank account (since the rental is not in another entity's name). However, when you convert to a rental, you may want to use a separate account just because it will make bookkeeping easier.
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Lauren Heinen
OP
Member since 2022 · 7 posts · 3 votes
3y
Awesome thanks a ton!
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John Mocker
Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes
3y
Lauren,
Just a note from the insurance area. Remember, once you move out and rent the house, most Homeowners policies will not longer be valid (they are for owner occupied dwellings). There are some companies that may continue the policy but must will require you to rewrite it to a Dwelling Fire form.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
3y
The property will be considered a business property once converted into a rental.

You will want to keep records of what you purchased it for along with any improvements.
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