Here's how this would work.
On Dec 31, 2020 (the tax year you're working on right now) convert the property and all it's assets to personal use. This does several things.
2020 Taxes
- Depreciation stops on all assets on Dec 31, 2020.
- All rental expenses incurred in 2020 are fully deductible on SCH E on your 2020 tax return.
- You will need to print out both of the IRS Form 4562's as well as the 8582 from your 2020 tax return for that property. You will "NEED" those forms when you make the property available for rent again, in 2022.
- The 8582 is only generated if you have any carry over losses. Due to a change in the law in 2018, it's perfectly possible you will not have any carry over losses. Therefore, no IRS Form 8582 would be generated for that rental property.
- If you have been amortizing points, then when you show the conversion to personal use any remaining points to be amortized will be fully deductible on the 2020 tax return.
Then for the 2022 tax year.
- You will not report anything concerning this property on SCH E at all. If it's the only rental property you have, then no SCH E will be filed at all with the 2021 tax return.
- The only deductible items concerning this rental property on your 2021 return is property taxes and mortgage interest. That's it. Period. They will be a SCH A itemized deduction.
- No other "ordinary" expenses you incur on this property in 2021 will be deductible anywhere on your tax return, ever. (Do not confuse this with property improvements, which are not "ordinary" expenses.)
-If the total outstanding mortgage balance of all of your mortgages on non-business real estate exceeds $750,000, then you will be limited in the amount of interest you are allowed to itemized on the SCH A.
- The maximum amount of all SALT (State and Local Taxes) you can claim as an itemized deduction on SCH A is $10,000. So if the total of all property taxes and any other state and local taxes exceed $10,000, you will be limited on the deduction for that as well.
For the 2022 tax year
- When you convert the property back to a rental on 1/1/2022 you must reduce the cost basis of all assets by all prior depreciation taken and depreciation starts over with the new reduced cost basis, from year one.
- Since all your points were deducted on the 2020 tax return when you converted the property to personal use, you have no remaining points to be amortized. Therefore, there will be no entry in the assets/depreciation section for that.
- You will have to manually enter any carry over losses from the 2020 return, as shown on the form 8582 from that tax year. (That is, assuming you actually have any carry over losses, as it's perfectly possible you will not.)
