“What is proper answer to the questions at the top of Sch E? The passive/non passive stuff is confusing. Materially involved? 1099's?”====>You do not need to check the boxes A & B in Part 1 on Sch E; you do not issue 1099 to any body;You do not need to issue (UNLESS you are rental biz/corp) a 1099 to a vendor/ pty management firm(if you use one). The type of pty is 1, single family residence. In general, rental real estate activity is considered passive. The IRS allows a deduction of passive activity losses reported on your Sch E only up to the amount of income on Sch E as long as yur pty is treated as vacation home(rented for 15 days or more and is used for personal purposes for more than 14 days or 10% of the days rented, whichever is greater) and you can deduct exp allocated to personal days on Sch A; however, if the home is rented for fewer than 15 days during the year, then, the rental icnoem is not taxable at all and mort int and r/e taxes may be allowed on Sch A of 1040.If the home is rented for 15 days or more and I sused for personal purposes for not more than 14 days or 10% of the days rented, whichever is greater, the home is treated as rental pty. The exp must be allocated between personal and rental days. Rental exp MAY exceed then rental income and the resulting loss’d be deducted against other reg passive/nonpassive income, subject to th e passive loss rules.
In general, residential rental real estate ownership is a passive activity (even if you materially/actively manage the pty)unless you are a real estate professional. Deducting rental real estate losses reported on Sch E on your personal income tax return is allowable under certain conditions. Whether you can use these losses to reduce your AGI depends on your total income and your participation in the activity. If you meet the Material Participation Test the IRS allows tax deductions where rental losses EXCEED rental income .The IRS allows you to deduct your residential rental real estate losses if you materially participate in the activity. However, yo u can deduct up to $25K of rental pty losses against other income, if you are actively involved in the mgmt. of the pty and your MAGI doesn’t exceed $100K;r/e rental to be an active , more than 50% of your personal serive is performed in r/e; you perform more than a750 hours of service in the rental pty. Using a property management company to manage your property
does not prevent you from meeting the material participation test
“Understand claiming the rental income as ordinary income. Can I deduct the pro-rata portion homeowners insurance for the rental period?”======> Your rental income on Sch E line is taxed as ordinary income and the net rental income is reported on page 1 line 17 of the 1040 tax form. As you said, you need to allocate insurance exp associated with the home is based on days of rental or personal use compared to the total number of days of use. For example , assume that you used the home for 10 days for personal use and 20 days for rental use, then 66.66%(20/30) of the ins exp needs to be allocated to your rental use on SCh E line 9. However, homeowners insurance for personal use is not eligible for a regular itemized deduction on Sch A on your federal income tax return.
“ Can I deduct the repair costs?”===>As you said, you rented it beginning Aug 1 2012 thru end of the year then as long as yu convert the residence to rental property, then you can deduct repair costs of $5k; unlike repairs made to your personal residence, rental property repair costs that are incurred to place the property in rentable condition or to maintain it are deductible on Sch E ( line 14) of your personal 1040 tax return. I guess you need to review your mortgage contract, if there is a loan on the property. If the home loan was expressly for a primary resident or the contract has a provision that forbids renting the property, consult with your attorney before proceeding with the conversion.You need to update your property insurance. If you convert the property to a rental and fail to have proper insurance, the property may not be protected.