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Income Tax: Conversion of a personal residence to a rental

A tax problem about how and where to report rental income items on income tax return forms:

Decision to sell or rent a condo for extra income to pay off the house. Have had condo rented for 5 years. Mike purchased a condo for $125,000. A similar condo recently sold for $165,000. They still owed $87,000 in mortgage payments. Their real estate agents told them that the rule of the thumb was to charge an annual rent to approximately one-seventh of the FMV of building. He agreed on asking $1950 a month plus utilities. Left appliances in condo, but renter has to take care of their own furnishings. The appliance had originally cost $9,000 but were now worth about $2,000.

On April 2, Mike ran ads in newspaper and a couple signed on the dotted line. The terms of lease were 1 year at $1950 a month, beginning May 1. The lessees required to pay a $1,500 security deposit and rent due at beginning of the month.

As of Dec. 1 they spent the following expenses on the condo.
Mortgage payments (12X$825)= $9,900
Homeowners Association Fees (12X$60)= $720
Real estate taxes= $3290*
Homeowner's insurance (April 1-March 31)= $300**
Advertising= $86
Rugs professionally cleaned= $475

*In Illinois, real estate taxes are assessed on a calendar-year basis. They are paid the previous year.
**Mike paid $115 annually before their premiums increased due to rental use of the property. Insurance premiums generally must be paid before the period covered.

Solution Preview

See attached files for Schedule E and Form 4562.

The rental activity will be reported on Schedule E and the following notes explain the reporting.

$15,600 Rental Income for 8 months assuming all was received timely. Note 1

$4,500 Interest Expense. Note 2
$540 Home owners dues. Note 3
$300 Insurance. Note 4
$86 Advertising is 100% rental
$3620 Depreciation

Note 1: the security deposit is not income provided it is maintained in a separate account and disclosed in the rental agreement.

Note 2: only the interest portion of the mortgage ...

Solution Summary

The 397 word solution presents 8 notes of explanation to support the filled in tax forms attached to the solution.