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sissonr1951
Level 2

Depreciation Basics

I have a second home purchased in 1997 that was used as a vacation home until 2014 when it was turned into a rental.

 

When I depreciate this second home is the home itself considered a depreciable asset that I list in TurboTax?

 

If so, since 1997 or only when it started to be used as a rental in 2014?

 

Can I depreciate major items such as flooring and appliances that were purchased prior to 2014?

 

thanks, in advance. 

 

2 Replies
Carl
Level 15

Depreciation Basics

When I depreciate this second home is the home itself considered a depreciable asset that I list in TurboTax?

Yes. You are required by law to depreciate it. Just work it through the program the way the program is designed and intended to be used, so the correct depreciation basis is established. This is important, because the value of the land is "NOT" depreciated. Only the value of the structure. The program will walk you through the process of determining land and structure values for depreciation purposes.

If so, since 1997 or only when it started to be used as a rental in 2014?

Depreciation starts on the date the property is place "in service". It does not matter when you purchased or acquired the property.  The "in service" date is the first day a renter "could" have moved in. Doesn't matter how long after that date it actually takes you to get a renter in the property.

Can I depreciate major items such as flooring and appliances that were purchased prior to 2014?

Yes. But I don't recommend it. Most states consider appliances and other non-real estate assets to be "equipment" used to generate income. They impose what's called a "tangible property tax" on that equipment each and every year that you have to pay to your state. (Some cities/towns and lower jurisdiction goverments assess this tax too.) You pay that tangible property tax to the taxing authority that assesses it, each and every year. So the "savings" you may think you realize by depreciating appliances, is usually less than the tangible property tax you will pay each and every year on those appliances.

Additionally, since rental property always operates at a loss "on paper" at tax time (especially if you have a mortgage on the property) depreciating the appliances separately will not make one single penny of difference to your tax liability each year.

However, when you sell or otherwise dispose of the property/appliances, you are required by law to recapture all prior depreciation taken and pay taxes on it. That depreciation recapture also increases your AGI in the year you sell it, and has the potential to put you in a higher tax bracket. So with the taxable gain realized from the sale along with the recaptured depreciation, you'll end up paying higher taxes in the year y you sell the property.

Also, appliances are depreciated over 5 years. So when that appliance breaks (and in rental property that will happen) disposing of the asset creates additional paperwork that is not worth it.

But the bottom line is, it's your call weather to depreciate the appliances separately or not.

The below information is for you to use in setting this up in TurboTax, assuming this is your first time dealing with rental property. This information provides you clarity that (in my personal opinion) the program does not, so that you get it set up correctly. Perfection in that first year for rental property is not an option - it's a must. Even the tiniest of mistakes will grow exponentially as the years pass. Then when you catch the error years down the road (if the IRS doesn't catch it first) the cost of fixing it will be expensive. So please, if you have questions or need additional clarity as you work this through the program, by all means please ask.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

tagteam
Level 15

Depreciation Basics


@sissonr1951 wrote:

When I depreciate this second home is the home itself considered a depreciable asset that I list in TurboTax?

 

If so, since 1997 or only when it started to be used as a rental in 2014?


Also note that your basis for depreciation is the lesser of:

 

 

  • The fair market value of the property on the date you changed it to rental use; or

 

  • Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis.

 

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