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Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1236
Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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Several years ago, we purchased property in another state which

Resolved Question:

Several years ago, we purchased property in another state which was in forclosure with the intentions of renting it out. For the past several years, we have invested money as we could afford it into this property to get it livable, such as replacing the windows, siding, etc. The house is not finished as of yet. Earlier this year, I made the decision to retire early due to the deteriation of my disabled husbands health. I retired in October, 2011 and received my last paycheck October 25th. We relocated out of state to this house and are currently living in it. My acquired sick leave is being used to pay my health insurance until the money is depleted. I received Social Security and a small pension in December, 2011. My husband gets Social Security Disability.
My first question is: Can I still claim this house as a rental up until the time we relocated here (we lived here 2 months in 2011)?
Second question: Will I have to file taxes in both states we lived in for the year of 2011?
Third question: My accumulated sick leave was converted to income and shows up on my W-2 form from my employer. Can the money paid towards my health insurance be deducted as a medical deduction?
Submitted: 2 years ago.
Category: Tax
Expert:  Arthur Rubin replied 2 years ago.

Arthur Rubin :

Interesting situation. I think I can answer all your questions, but I may need research it further this evening.

Arthur Rubin :

First, you said "the property is not finished as of yet," and then you later say you moved there. My question is, did you ever put the property up for rental?

Arthur Rubin :

I can't answer your first question untill you tell me when the property was available for rental.

Arthur Rubin :

For the second question, you will have to file taxes in both states (if they both have an income tax). In the event that some income is taxed by both states (for example, if earned in one state and received in the other), there will be an offset provision so that you will get a credit in one state for the tax paid in the other.

Arthur Rubin :

I don't see a specific instance of that occuring if you moved after you recieved your last paycheck and accumulated sick leave; as you don't specify whether you received the sick leave as a lump sum, I can't tell if it that occured..

Arthur Rubin :

For the third question, if your W-2 reports the accumulated sick pay less health insurance, then that's what you pay taxes on. If it reports the accumulated sick pay, then you can deduct the health insurance as a medical expense. According to the IRS, most people claim less in medical expenses than the 7.5% of adjusted gross income, so it wouldn't do them any good. I don't know your specific circumstances, but Medicare parts A (if you have to pay for it), B, C, and D are also deductible as health insurance.

Arthur Rubin :

I should add that, if you did ever get the property ready for rental, you would already have to file a tax return in that state, as the rental income is subject to tax in that state as well as your residence state, but most people take a loss on rentals, so you wouldn't have to pay taxes to that state. Again, as in my answer to your second question, if you owe taxes to both states, there is an offset provision.

Arthur Rubin :

I'm going to be here intermittently for the next few hours. If you have further questions, I'll try to answer them when I'm here.

Arthur Rubin :

If you want immediate answers, you can reopen the question for other experts.

Customer:

No, we never did put the property up for rent because it is not finished. The house is livable but not completed. We still have to complete putting on a new roof and complete the siding (both only half finished), as well as rewire the house and do some electrical work. If my husband's health had not deteriated (he has stage 4 end-of-life stage of emphysema), we would have eventually finished the house and rented it out. But with my husband's health, we decided I would retire and move into the house, since we owned it and it was fit to live in. The work left to be done doesn't impair our living there.

Customer:

My W-2 form reports the accumulated sick pay. We usually do exceed the 7.5% for medical deductions.

Arthur Rubin :

I'm sorry to hear about your husband. I hope it works out as well as it can.

Arthur Rubin :

For your first question, then, you can't claim it as a rental. You might do better claiming it as a vacation home; that way, at least you can deduct mortgage interest and property taxes. As an investment property, claiming the mortgage interest would be problematic.

Arthur Rubin :

When you sell your previous house, you can still claim the $500,000 gain exclusion if you do it within 3 years after your move.

Arthur Rubin :

Returning to your third question; health inurance is either excluded (if done properly in the W-2) or deductible as a medical expense. There was something in ObamaCare which would have limited the medical deduction for health insurance, but it's been deferred until 2018.

Customer:

How do you change a rental home (which I had in previous years listed it as) to a vacation home? We were renting our previous house, so selling wasn't a problem.

Arthur Rubin :

I'm afraid you should amend prior year returns to remove schedule E for the property which was not actually available for rental, but add its mortgage interest and property tax to your schedule A. This will probably increase your taxes, so you will also have to pay interest, but probably not penalties.

Arthur Rubin :

Many states have one more year open then the Federal government's 3 years from the filing date (or due date, if later); you may only amend Federal 2008 and later returns.

Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1236
Experience: 22 years of tax preparation experience, including individual, trust, and estate returns.
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