Rental Property converted to personal use.
In the tax year you covert the property to personal use, it is important to print out the two form 4562's for that property. The two I'm referring to both print in landscape format. One is titled "Depreciation and Amortization Report" and the other is "Alternative Minimum Tax Depreciation". Print both forms and keep them. You "will" need them at some point in the future. (discussed below)
Rental property converted to personal use, then back to rental.
If you convert the property back to rental property in the future, depreciation will start all over from year one, using the adjusted cost basis of the property. You will "not" change the cost basis of the land since land is not a depreciable asset. You will change the cost basis of the structure only, along with any other listed assets that are "in fact" depreciated. Basically, the adjusted cost basis of the structure is figured by subtracting all prior depreciation taken from the original cost basis that was used in the past when it was a rental. Then you'll use that new cost basis to start depreciation again over the next 27.5 years.
You sell the property.
If you sell the property, if that property was depreciation at any time during your ownership, you are required to recapture all depreciation taken in the year of the sale, and you will pay taxes on that recaptured depreciation. Yes, you have to recapture "ALL" depreciation, which includes depreciation taken during the first period of time it was a rental. Be aware of a few things concerning recaptured depreciation.
1. Recaptured depreciation is added to your AGI and depending on the numbers, has the potential to bump you into the next higher tax bracket in the tax year you sell the property.
2. The increased AGI can potentially disqualify you for some tax credits, such as the Earned Income Credit (EIC).
3. Recaptured depreciation is taxed anywhere from 0% to a maximum of 25%. That maximum can matter if the gain on the sale bumps you into the 32% tax bracket. If that happens, then the recaptured depreciation will be taxed at a maximum of 25%.
You gift the property.
Weather you gift the property to your parents or someone else, the recipient's cost basis will be the "lesser" of the adjusted cost basis (subtracting depreciation taken) or the FMV at the time of the gift. So even if you gift the property, all depreciation taken will still be accounted for and eventually taxed one way or another.
