Converting basement rental back to personal space?

[watersdo]

I rent out my basement and I'm considering converting it back to personal space.  I've been reporting my rental income from it on Sch E and claiming depreciation for it the last 10 years.  My home has increased in value substantially. I'm assuming that I'll owe taxes and have to repay depreciation once I stop using it as a rental.  Can someone please provide guidance for estimating what I will owe?

[TaxGuyBill · Accepted solution]

No, there won't be any tax when you convert it to a personal use space.

When you sell the property, that is when taxes may be owed.  At that time, the depreciation will usually be taxed at 25% (plus state).  The rest of the sale depends several factors, including if the basement rental was a separate living unit or not.

When you do convert it to personal use, then for TurboTax, you just go through the introduction to the Rental section and each "Asset" to indicate it was converted to personal use.  That will stop the depreciation.

[watersdo]

Thanks!  If it's determined to be a separate living unit, would it be advantageous for me to convert in a particular year (e.g., a low income year or a year when home values are low)?  Does any of that matter in the longrun?

[watersdo]

Also, any guidelines for determining whether it's "separate" or not?  The rental has a separate entrance, but upstairs, there's a shared area that joins our living spaces.  The rented area has a 3/4 bath and kitchenette, but no oven.

[TaxGuyBill]

The separate entrance, bathroom, and kitchen would usually make it a separate unit.  However, the 'shared' area may be able to get you out of that.   Can you access the other 'unit' without going outside?  If so, I would not worry about the issues for a separate unit (which are a bit of a gray area anyways).

Again,, the conversion to personal use has not affect on your taxes (besides stopping depreciation), so the timing of that is not imporatant from that viewpoint.  However, in case it were to be questioned about being a separate unit, I would recommend converting to personal use (as part of your Main Home) at least 2 years before it is sold.

[watersdo]

This is very helpful.  Thank you!