Mortgage Interest and Taxes

[ruthc]

I just found something on last year's tax return that a new tax client had prepared by someone. She has rental property. Normally I would prorate the mortgage interest and taxes, etc to the rental property and the difference goes to Sch A. In this case the prior preparer entered the interest/taxes on Sch A in order for the TP to be able to itemize instead of prorating the amount and letting the TP take the std deduction instead. I don't know her reasoning because she would have made out better by prorating. Anyway, my question is in the state return (MA). Of course the interest/taxes weren't included on the rental property that got transferred to the state so she didn't get the benefit of the taxes/int. My question is......if the TP would have benefited more from itemizing with the total amounts rather splitting the amounts to Sch A and E (like she did) could she then have used the prorated amounts for int/taxes on the state Sch ESch E? Of course, the Sch E for federal would have been different from the state.

[DaveinTexas]

Shot in the dark

I think there might be some details missing from your post. Why would the mortgage interest and property taxes be pro-rated to the A and E? Does your client live in the rental property as their primary residence? Rent out a room(s)? Was the TP's home converted to a rental property during the year?

So many questions....so little time.

[ruthc]

She lives in her rental home

She lives in her rental home. (3 family with her in 1 of the apts.

[Maribeth]

How many apartments are in the building? Does you client live in one apartment and then rent out two others?

[Burke]

Sounds like 4 apts and one is personal and she files a Sche E and pro-rates certain expenses. So, last year was done incorrectly. The int/taxes should have been prorated as well. You can't arbitrarily shift deductible items around so that she can itemize.

[Gary2]

Sounds like 4 apts and one is personal and she files a Sche E and pro-rates certain expenses. So, last year was done incorrectly. The int/taxes should have been prorated as well. You can't arbitrarily shift deductible items around so that she can itemize.

And likewise, you can't arbitrarily shift them around to convert a passive loss to a passive gain.

[Gary2]

Of course, the Sch E for federal would have been different from the state.

Unless there was bonus depreciation or other clear differences, I don't see why the MA E-1 would be different from the federal E.

[ruthc]

Will be doing amended returns

After reading these comments and asking a lot more questons (pulling teeth!) I am going to do an amended federal and state return for 2012. I didn't think you could just pick and choose whether to allocate or not, especially federal versus state returns. Your comments set me in the right decision which I thought was correct to begin with.

Thanks to everyone for all the comments to any of my threads. I learn something everyday!!! I always feel more confident that I am doing the returns properly.