Rental depreciation when rented on and off over time

[Jim202010]

I'm converting to 2019 TurboTax from a paid preparer in 2018 and am entering Schedule E Rental assets with Asset Entry Worksheets of the desktop version using the depreciation schedules from the 2018 return.

The property has been rented with a gap or two when not rented for many years and this was taken into account by the tax preparer.

If I enter the prior depreciation for 2019 as indicated in the 2018 return, TurboTax is giving me a very large current depreciation deduction rather than the amount indicated from the 2018 return.

I can make the current depreciation deduction match if I put in the larger prior depreciation from the Asset Life History.  But then I'm left with a too large prior depreciation.

Is there any way to get TurboTax to handle this situation?

[AmeliesUncle]

---

@Jim202010 wrote:

The property has been rented with a gap or two when not rented for many years

---

Was it used for personal use during that gap?  

In my opinion the proper way to do it is to treat it as a new rental that was "placed in service" in 2019.

You use the LOWER of (1) Adjusted Basis (usually cost minus prior depreciation) or (2) the Fair Market Value of when it was converted to a rental.

[Jim202010]

The answer I got was:

• Treat the missing months as not having depreciation and continue depreciation when back in service.  Sort of a "pause" in depreciation.
• There is no way to represent this in TurboTax so you have to create your own spreadsheet and put overrides into the asset worksheet, which means doing this every year until fully depreciated or else disposed of.

[AmeliesUncle]

If you converted it to personal use, that is taking it out of service.  That means you re-start it anew.

[Jim202010]

Do you start it anew with the depreciated basis and a full 27.5 year life (for a structure)?

[AmeliesUncle]

Yes, you restart the 27.5 years.   As for the amount, my first comment answered that.

[Carl]

The property has been rented with a gap or two when not rented for many years

The bottom line is, the TurboTax program flat out can "NOT" deal with this situation "CORRECTLY" unless "you" fudge a few numbers.

Basically,for whatever period of time the total of each "gap" is, you have to add that time to the original "in service" date in order to close and elimiate the gap.  That will do two things:

1) Make the 2019 depreciation correct.

2) Violate federal law because you will be knowing and willingly falsifying information on a federal tax return when you change the original "in-service" date of the asset(s).

Now if you elect to "over-ride" (which is not possible with the online version of the program) so that you can make the return mathematically correct without falsifying information on the return, then you will not be able to e-file the return. You will have to print, sign and mail the return to the IRS. (Will also have to mail the state return if your state taxes personal income.)

[Jim202010]

Thanks @Carl 

In your first case of fudging, I've tried changing the start date and entering the prior depreciation but the asset life worksheet extends out another 27.5 years (of course).  So I guess you would have to manually watch when the basis goes to zero.

I think I will need to create a spreadsheet to account for the gap and override to be accurate.

Do you believe that the gap should just push out depreciation into the future or start over as @AmeliesUncle  says?

For example in round terms:  If you depreciated for 10 years then not for 10 years would you then have:

• 17.5 more years of depreciation at the original depreciation rate to reach zero after a total of 37.5 years, or
• 27.5 more years of depreciation to reach zero from the reduced basis to reach zero after a total of 47.5 years?

I guess I'm destined for paper filing and manually calculating depreciation on out.  :(

[Carl]

I've tried changing the start date and entering the prior depreciation but the asset life worksheet extends out another 27.5 years (of course).

I don't think we're on the same page here. Here's a scenario of what I"m talking about.

In service - Jan 1st, 2000 to Dec 31st 2005.

Personal use Jan 1st, 2006 to Dec 31st 2018.

Now I"m placing the property back "in service" on Jan 1st 2019. Using the program as it's designed and intended to be used, I'll show an "in service" date of Jan 1st, 2019. That starts depreciation over again from day one, no matter what I put in for prior year's depreciation. That's wrong and not legal.

So I eliminate the gap by making my in service date Jan 1st, 2014. That will eliminate the gab from Jan 1st 2006 through Jan 1st 2019, and will automatically cause the program to figure the first 5 years of depreciation "for me", even though those 5 years were "actually" 2000 to 2005. My "fudge" puts me 5 years into the 27.5 year depreciation schedule so I've got 22.5 years remaining as of Jan 1st, 2019. That would be correct. However, I have falsified my "in service" date to make the depreciation right. It doesn't matter, as I'm knowingly and willingly filing an incorrect tax return.

Chances are, this will flag me for an audit in the tax year I sell the property. That's because on what will be the most recent tax return I'll have that fudged in-service date. However, on returns prior to that fudged in service date I've reported rental income on that same property and no rental income for 5 years "after" that fudged date. That's enough to make any IRS agent go "HUH???"

[AmeliesUncle]

---

@Carl wrote:

Now I"m placing the property back "in service" on Jan 1st 2019. Using the program as it's designed and intended to be used, I'll show an "in service" date of Jan 1st, 2019. That starts depreciation over again from day one, no matter what I put in for prior year's depreciation. That's wrong and not legal.

---

Um, no.  Why do you say that?  It is just the opposite.  It was taken OUT of service.   For purposes of depreciation, converting it to personal use is considered a disposition.  Because it is treated as a disposition, when it is later "placed in service", you re-start things.  You don't "pick up where you left off".

[Carl]

Because it is treated as a disposition, when it is later "placed in service", you re-start things.  You don't "pick up where you left off".

Your commend just switched on light bulbs for me. Thanks.

Taking a property out of service for personal use is not a disposition in the sense of "disposing" of anything. It'

s a conversion. When placing prior business property converted to personal use, back in service as business property, you "MUST" take into account the prior depreciation. No if's, and's or buts about that.

I just realized that what you have to do is reduce your cost basis on the property (specifically on the depreciated structure, and not the land) by the amount of prior depreciation already taken. Then your depreciation starts over based on the new, reduced cost basis.

[Jim202010]

Thank you both so much!

I did the restart from the back in service date with the depreciated basis.

And I hope this means that it will go through as an e-file...

[Jim202010]

For future travellers, it appears that having prior depreciation with an asset will trigger the Form 3115 questions for "Change in accounting treatment" for the Schedule E "discrepancy".

[Jim202010]

A change in service/use ought not to require a Form 3115:

===

Changes that do not require Form 3115 because they are not considered changes in a method include, and which may only be made on an amended return:

1. A change in computing depreciation because of a change in the use by the same taxpayer,

1. Changes in placed-in-service dates.

1. A change in useful lives,

1. Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct bonus depreciation). If you elected not to claim any bonus, a change from not claiming to claim bonus is a revocation of the election and is not an accounting method change. Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. You must submit a request for a letter ruling to make a late election or revoke an election.

[Carl]

For future travellers, it appears that having prior depreciation with an asset will trigger the Form 3115 questions

Is the program "forcing" you to file the 3115? Or can you opt out/bypass it with specific elections?