Splitting The Rental Property Baby

By Jason Watson, CPA
Posted Sunday, May 25, 2025

There are two situations where you need to use some math to determine the expenses and where they end up on a tax return.

Splitting Between Rental and Primary Residence

When you convert your rental property back to a residence, either a primary or second home, or if you convert your primary residence into a rental, there are prorations of expenses. The obvious ones are mortgage interest, real estate or property taxes, and hazard or homeowners’ insurance. Non-rental mortgage interest and taxes might be deductible on Schedule A of your individual tax return (Form 1040) subject to all the hoopla and limitations found there. Non-rental insurance is typically lost.

This is an easy two-step process-

• First, compute the overall rental property percentage. You converted a primary residence to a rental property on August 1. This would be 212 days as a primary residence or 58%.
• Second, apply this percentage to common expenses between the residence and the rental property such as mortgage interests, taxes, insurance, utilities and HOA dues, among others. Keep in mind, and we touch on this below as well, certain expenses might be 100% related to the rental property such as advertising, management fees and supplies. Repairs can be a head-scratcher depending on the repair, timing, and which way you are going (from home to rental, or rental to home).

Splitting Between Rental and Personal

We mentioned this issue here and there throughout this section. There are two common situations where you need to assign a business use percentage to a rental property expense-

• You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of 14 days, or 10% of the total days it is rented to others at a fair rental price. These are vacation home rules.
• You convert your primary residence or second home into a rental property, or take a rental property out of service where it is no longer being held for the production of income.

Advertising, marketing, management fees, licenses, permits and occupancy taxes are usually 100% associated with the rental property.

Supplies can be murky, right? That bottle of dish soap might be used both by guests and you. Perhaps you argue that coffee pods are solely for guests.

Repairs might be equally murky. What if you can demonstrate that a repair was required because of damage from a guest, and not normal wear and tear. Replacing a door handle might be considered normal wear and tear, and as such will be allocated between the rental property use and personal use. However, this same door handle is replaced because your guest broke the key off inside the lock. That might change things a bit, right?

There is no shortage of examples.