Can I deduct property tax on Schedule C for partial year rental property?

You'll need to allocate the property tax based on the time the property was used as a rental. Since you used it as your residence for 5 months and as a rental for 7 months, you should deduct 7/12 (about 58.3%) of the property tax on Schedule C. There's also an important distinction here - if this is truly a rental property, you should be using Schedule E rather than Schedule C. Schedule C is for self-employment businesses, while Schedule E is specifically for rental real estate. This makes a difference because income reported on Schedule C is subject to self-employment tax, while rental income on Schedule E is not. Additionally, you need to be careful about the timing of the property tax payment. If the property tax you paid in April 2023 was for the 2022 tax year, you need to consider when you actually paid it and what period it covers, not just when the property became a rental.

After dealing with a similar rental property situation last year, I discovered a tool that completely saved me from making costly mistakes on my taxes. I was totally confused about how to handle partial-year conversions and property tax allocations until I tried https://taxr.ai. I uploaded my property tax statement and answered a few questions about when I converted my home to a rental, and it guided me through the exact allocation I needed to make between Schedule A and Schedule E. The step-by-step guidance helped me understand not just what to deduct but exactly where to report everything. What I found most helpful was that it explained the difference between property taxes for the period I owned it versus when I paid them, which was causing me so much confusion before.

Thought I'd update after trying taxr.ai that was mentioned above. I was totally skeptical (still am about most tax tools), but it actually answered exactly this property tax allocation question for me. The tool walked me through the timing issues with my property taxes and confirmed I needed to split them between Schedule A and Schedule E since I converted mid-year. The most helpful part was explaining that property taxes are deductible when paid for cash basis taxpayers, but you still need to allocate based on the property's use during the year you paid them. This was exactly what I was confused about. It also cleared up my confusion about whether my rental activity should be on Schedule C or E (definitely Schedule E in my case since I'm not providing "substantial services" to tenants).

If you're struggling to get answers from the IRS about your rental property tax questions, I highly recommend using https://claimyr.com. I had several questions about property tax allocations and depreciation start dates that weren't clearly answered in IRS publications. After spending hours trying to get through to the IRS directly (kept getting disconnected or told the wait time was 2+ hours), I decided to try Claimyr. Within 45 minutes of using their service, I was speaking with an actual IRS representative who confirmed exactly how to handle the property tax allocation on a mid-year conversion to rental property. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Basically, they navigate the IRS phone system for you and call you back when they've secured a place in line with an agent.

I need to apologize for my skeptical comment about Claimyr above. After struggling for THREE DAYS trying to get through to the IRS about my rental property depreciation questions, I broke down and tried the service. I was absolutely convinced it would be a waste of time. I was completely wrong. About 40 minutes after setting it up, I got a call connecting me directly to an IRS representative who answered all my questions about property tax allocations for my converted rental property. The representative confirmed I needed to allocate the taxes based on the property's use during the year I paid them, and gave me detailed instructions on how to document everything. The service just navigates the phone tree and waits on hold for you - then connects you when a real agent is on the line. This saved me from having to sit by the phone for hours. Had to eat my words on this one.

One thing nobody has mentioned yet - make sure you're also depreciating the property correctly once you convert it to rental use. You'll need to determine the fair market value at the time of conversion (June 1, 2023) and begin depreciating from that point. The depreciable basis would be the lower of your adjusted basis or the fair market value at conversion. And remember you can only depreciate the building, not the land. Most people use a 80/20 or 75/25 split for building/land unless you have an appraisal that states otherwise. Property taxes are just one piece of the rental property puzzle!

Don't forget another important aspect - if you plan to eventually convert the property back to personal use or sell it, keep very detailed records of all improvements and expenses. I made the mistake of not tracking these properly and it caused major headaches when I sold my rental. Also, start a separate bank account for the rental income and expenses if you haven't already. Commingling personal and rental funds makes accounting much harder and increases audit risk.