Rather than thinking about it as a suspension of depreciation for a period of time, think of each change in use as a "conversion" from one type of use to another.
The first change -- converting part of the rental property to personal use -- would be considered a disposition of that portion of the property. A disposition of business property usually results in recognition of gains and deprecation recapture. But, when the disposition is because of conversion to personal use, the regulations say that gains, losses, and depreciation recapture are essentially suspended until the property is eventually sold. See 26 CFR 1.168(i)-4(c)
The second, eventual, change will be to put personal use property into service as a business asset. When you do that, you will use the adjusted basis of the property (plus any new capital improvements) for its depreciable value and start a new 27.5 year depreciation schedule with the date it starts being a rental property again.
For instance, if the original basis of that portion of the property was $50,000 and you have depreciated $10,000 of it at the time you convert it to personal use, then its adjusted basis is currently $40,000. Say that you make $7,500 of capital improvements to that portion of the property while it is being used as your personal residence. When you put the property back into service as a rental, you will use $47,500 as the depreciable basis with the new in-service date and depreciate it over the full 27.5 period for residential rental property.
As for entering this information into TurboTax, I would find it easiest to have separate assets entered. For example:
- Rental Unit A -- was a rental and is going to continue to be a rental
- Rental Unit B -- was a rental and will be personal use for a while
- Capital Improvements for Rental Unit A
- Capital Improvements for Rental Unit B -- was a rental and will be personal use for a while
If you don't already have it split out this way, you can do some spreadsheet work to divide the assets up into smaller parts. (e.g. if Rental Unit A is 600 sq ft and Rental Unit B is 400 sq ft, then enter them as two separate assets with 60% of the original cost and accumulated deprecation assigned to Rental Unit A and 40% to Rental Unit B). Make sure that the totals for the divided assets match the totals for the original "whole" asset.
Once you have the separate assets listed in TurboTax, then it will be easier to walk through the program's questions and answers. For the unit being converted to personal use, you would tell the program that you have done just that. It will walk you through the "disposition" of that unit. You'll also "dispose" of any capital improvements that are associated with that unit.
Then, when it comes time to move that property back to rental use, you would enter it as a new asset using the example I gave above to get to the depreciable value. Basically -- you will pick up where you left off in terms of the undepreciated basis of the property, but the clock will start over for a new 27.5 year period.
Make sure to keep track of how you get to your numbers so that it will all still make sense to you in a few years when it comes time to put that unit back into service as a rental.
Thank you for participating in this event!
-- KimberW
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-- KimberW
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