Change in percent of Duplex rented and effect on depreciation schedule

[Randool]

I have an owner occupied duplex. For the first ten years, we rented the top floor, 50% of the house and depreciated at that level. We then renovated and for the past 16 years have rented 28% of the house and depreciated that percentage. My question is: is all depreciation complete in 27.5 years regardless of whether or not it was rented at 50% or 28% or does the depreciation on the 28% rented start the "clock" over on 27.5 years? In other words, does any depreciation end in 1.5 years or do I continued to depreciated the 28% rented for another11.5 years. Thanks!

[GeorgeM777]

Yes, if we understand your question, the 28% of your house you started to rent has its own depreciation schedule separate and apart from the depreciation schedule relating to the top floor of your house.  Thus, it appears the depreciation will end for the top floor before the 28% of your house, assuming you continue to rent out the top floor for the remainder of its depreciable life.  

@Randool

[Randool]

Thanks for the reply. Unfortunately, it seems I did not explain my situation as well as I might have. The 28% replaced the 50% that was rented. In other words, after renovating, we now occupy 72% of the house for our personal use and rent just 28%, not 28% AND 50%. Perhaps the answer is the same regarding the 28% that is now rented? That depreciation schedule continues for the 27.5 years while the 50% depreciation ended when the 28% began? With this clarification, more advice would be greatly appreciated.

[JillS56]

Yes, the answer is still the same regarding the 28% that is now rented.  Depreciation continues for 27.5 years.   The 50% depreciation ended when the 28% began.   

[Randool]

Thanks for taking the time to respond! 

[Carl]

Something's not right here. It appears that the others are not understanding your initial post the same way I do.

For the first ten years, we rented the top floor, 50% of the house and depreciated at that level.

So from 1995 through 2004 (ten years) you rented 50% of the house and depreciated accordingly with depreciation starting a some time in 1995.

We then renovated and for the past 16 years have rented 28% of the house and depreciated that percentage.

Would help to know exactly what those renovations were. But working with what we have here, after renovations were complete around 2004 or 2005, you added another asset (your renovations) and only rented 28% "of that asset" with depreciation starting in 2005 "for that specific asset".

Depreciation for the initial 50% is for 27.5 years and does not end until 2021 or 2022, depending on what month the asset was originally placed in service in 1995. Under no circumstances and with no exceptions will that "ever" change for any reason for so long as you own the property. There are no exceptions.

Depreciation on 28% of the renovation started in 2004 or 2005 and depreciation on that asset does not end until 2031 or 2032, depending on exactly when the asset was placed in service.

Now, if you renovated the rental portion of the property that is 100% exclusive to the renter, then the rental use percentage of that would not be 28%. It would be 100% "if" what you renovated was for the exclusive use of the renter.

If what you renovated was for your "personal use" portion only, and that added to the overall cost basis of the entire property, (and it would of course) then you could enter that as another asset with an in service date of 2004/2005 (whenever the work was completed) and then depreciated 50% of that starting in 2004/2005.

That would be the correct way to have done things and is one way that your initial post "could" be interpreted and understood.

[Randool]

Appreciate you taking the time to delve into the complexities of this. I now have a better basis for knowing how to proceed. Approaching 27.5 years prodded me to get a clearer picture of this and I am now going to look in more detail at my records from the time. I seek sporadically the help of an accountant and he advised me at that time. I could not find even the beginning of an answer to this elsewhere and your help is invaluable.

[Carl]

I know on my rentals I try to keep the depreciation as low as possible. There are those who have the impression that depreciation is a permanent deduction. It is not. When you sell the property, all prior depreciation is required to be recaptured and taxed in the year of the sale. Two things about recaptured depreciation.

1) While taxation of recaptured depreciation is presently capped at at a maximum of 25%, that recaptured depreciation adds to your AGI and therefore has the potential to bump you into the next higher tax bracket.

2) Recaptured depreciation is taxed as "ordinary income" instead of the higher capital gains rate, up to a max of 25%. Of course, your "gain" on the sale still gets taxed at the capital gains tax rate.  So if the increased AGI keeps your tax bracket below 24%, you don't really "notice" anything. Otherwise, you may notice it on "other" ordinary income with the jump from the 24% bracket to the 32% bracket.

Of course, all that depends on "the numbers" in the tax year you sell, and it's darn near impossible to even have the slightest clue what those numbers will be either.