Calculate Depreciation

[Teabone]

Hello,

I have a property that I have held as a rental for many years and 3 years ago I converted it to my personal residence due to job change that required me to move to that city where the property is located.  I lived there 2 years and then moved back to my previous personal residence. I rented it out for most of 2018 so I am trying to figure out what to do to start treating it as a rental for depreciation purposes in Turbo Tax.

Thanks!

[Carl]

The TurboTax program is not capable of handling your specific situation correctly. Thats' because you have to pick up depreciation where you left off. The problem is explained with this ficticious scenario:

Rental property 2000-2015 and converted to personal use on Dec 31 of 2015. Total depreciation taken is $15,000 which averages out to $1000/year.

Personal use from 2016 thru 2018. So no depreciation taken.

Converted back to personal use on Jan 1 of 2019. When you enter the original in-service date of Jan 1 2000 the program will "assume" it was a rental from Jan 2000 through Dec 2018 and will "incorrectly" show prior depreciation taken as $18,000. When you change that prior depreciation amount to the correct amount of $15,000, the program will "still" assume it was a rental the entire time and will incorrectly *FORCE* you to take $4000 of depreciation for 2019.

So the only way to make things correct is to do a manual over ride (not possible with the online version of Turbotax). If you do a manual over ride, two things become true.

1) You can not e-file the return. You have to print, sign and mail it to the IRS.

2) You automatically invalidate the Turbotax 100% accuracy guarantee.

[KarenM90]

 If you rented it in 2018 as well as 2019, you will need to assume that the rental begin date is when it was rented in 2018, depreciation will start at that point for 27.5 years. Per IRS Reg. Sec 1.168(i)-4(b) 

So if you are working on your 2019 tax return, you will use a basis which will be the lower of the adjusted basis on the date of conversion or the properties fair market value on the date of conversion. 

Note:  For calculation purposes, the "lower of the adjusted basis on the date of conversion" will be the original adjusted basis, less depreciation that was taken previously.

Your 2018 tax return should reflect the above calculated cost basis and 1st year of the 27.5 year depreciation.

Your 2019 tax return will be the 2nd year of the 27.5 depreciation period.

TurboTax will walk you through the entry once you have the basis calculation.

[Teabone]

Thanks for the information. I looked at the IRS regulation you quoted and it looked like to me that it is more for personal residences being converted into a rental rather than my situation where it was a rental, then personal residence and now back to a rental. Do you believe that regulation will still apply? The other response I received said to just reinstate the previous depreciation amount for the remaining useful life rather than starting the depreciation time frame all over,,,

Thanks!

[Hal_Al]

Fudge the numbers in TurboTax.

Using Carl's example:

Rental property from Jan 1, 2000-2015 to  Dec 31 of 2015. Total depreciation taken is $15,000 which averages out to $1000/year.

Personal use from 2016 thru 2018. So no depreciation taken.

Converted back to personal use on Jan 1 of 2019. 

It was out  of service for 24 months. Instead of using Jan 1, 2000 as the depreciation start date, change it to Jan, 1, 2002.  That will force the right numbers into the depreciation calculation going forward. 

[Carl]

That will force the right numbers into the depreciation calculation going forward.

Yes, that would work just fine. But I do wonder if that would raise flags with the IRS. Here's why I point this out.

Suppose you sell the property in 2020. If that property was your personal residence 2016-2018, then you qualify for the "lived in 2 of last 5 years" capital gains exclusion. But your tax return will show in the depreciation history, depreciation taken for all 5 of the last year's you owned it. Seems to me that would raise flags big time with the IRS and the nightmare that would create if they audit and deny the capital gains exclusion based on that, *will* *hurt* *your* *wallet* big time.

[Hal_Al]

My experience is that, at sale time, you're only asked  for the lump sum depreciation previously taken.  The only entries, for depreciation is line 22 of form 4797 and line 19 of Schedule D.  You do not have to identify, on the tax forms, the years the depreciation was taken.   You should, of course, nave your own records in case of an audit.

[AmeliesUncle]

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@KarenM90 wrote:

 If you rented it in 2018 as well as 2019, you will need to assume that the rental begin date is when it was rented in 2018, depreciation will start at that point for 27.5 years. Per IRS Reg. Sec 1.168(i)-4(b) 

So if you are working on your 2019 tax return, you will use a basis which will be the lower of the adjusted basis on the date of conversion or the properties fair market value on the date of conversion. 

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@Teabone   Karen is correct.   You need to restart the 27.5 years starting in 2018.  You are not allowed to pick up where you left off.

If you look at (c) in that regulation, it shows that when you converted it to personal use, it was treated as a "disposition" (although no gain or loss is recognized at that point).   Because it was 'disposessed', when you started renting it in 2018, it was like starting to rent for the first time, and you start the 27.5 years anew.  So use 2018 as the "placed in service" date.