should I delete that rental and keep all forms from my 2020 and 2021 tax returns and use them later when I decide to sell that property (let's imagine in 2 years to avoid paying taxes) or should I file amended tax return for 2020 year to properly "convert it to primary residence"?
If you don't show a conversion to personal use and just delete it from your 2021 return, then that "could" have the potential to raise eyebrows if you don't show the SCH E on your 2021 tax return.
You should amend the 2020 return and show a conversion to personal use between at least one day after the last renter moved out, and the day you started moving in.
When done, there's three documents you'll need to print and keep from the amended 2020 return.
The form 4562 that prints in landscape format titled "Depreciation and Amortization Report"
The form 4562 that also prints in landscape, titled "Alternative Minimum Tax Depreciation Report"
The IRS Form 8582-Passive Activity Loss Limitations.
You will need those forms at sometime in the future when one of three things happens.
1) You convert the property back to a rental
2) You sell the property
3) You die.
When amending make absolutely certain you read the small print on all screens. Otherwise, you may not complete the conversion process entirely and correctly.
