I have a house with 2 apartments upstairs that I rent out regularly. However, if I do not rent the apartments for one year, can I still depreciate them or claim any repairs I might make or do I just ignore them for that year and pick up again next time they are rented? If I don't rent them I won't have any income from the apartments.
It would depend on intent. Why are you not renting them out ?
Are you taking them off the market on purpose for an extended period to last more than one tax year ?
Or are you repairing/improving the property and it happened to take more than one tax year to complete the work?
Having the units or one unit actually rented out doesn't play into this "per-se".
So long as you are actively trying to rent a unit out, it remains classified as a rental property and depreciation does not stop. Bus should you convert it to personal use, or leave it classified as a rental during your "down time" for renovation and repairs? It depends. Here's a few of my thoughts on the matter.
If you are not attempting to rent it out because the unit is undergoing renovations or repairs, then the unit remains classified as a rental and depreciation continues during the "down time" for renovation and repairs; provided the down time is not extensive. Now the definition of "extensive" is subjective.
If you have a property that is not rented and you are not attempting to rent for an entire calendar year because of ongoing work on the property, then it would probably be best to convert it from a rental to personal use with a conversion date of 1 Jan for the tax year the property will not be rented for that entire 12 month 365 day year. But when you convert it back to rental the following year it's not simple matter of picking up the depreciation where you left off. There's a lot of manual math involved, as the cost basis of the base property will be reduced by the amount of prior depreciation already taken, and the 27.5 year depreciation cycle starts over from year one. Additionally, any property improvements done during the "down time" add to the cost basis.
Also, during the period it's not classified as rental property, standard rental expenses are just flat out not deductible on SCH E. Things like utility costs, property taxes, mortgage interest and property insurance. Only the mortgage interest and property taxes would be deductible as a SCH A itemized deduction, and subject to limits imposed with the TCJA of 2018. Now it's perfectly possible that some of the utility cost could be rolled into the renovation/property improvements costs. You need electricity for running power tools, as well as water for mixing concrete. It's not like those things are free.
Thank you for your quick response. At this point in time, we are trying to decide whether to change the rental units to personal use for a year, maybe two, and then rent them again. The reasoning is Covid. The rentals are in one building in which we live, and we are both at high risk if we should catch Covid, so our thought is to not rent until Covid is better. We cannot risk our lives if some renter winds up infecting us. And the rental moratorium on evictions doesn't help small Mom and Pop operations, although it may be ending, who knows if it will be reinstated. We can't afford to pay the mortgage and renters utilities if they don't pay... so it is kind of a big question for us. We could definitely do some repairs during the "downtime".... just trying to calculate what would be the best route for us to take both financially and health-wise.
You mentioned the following: "There's a lot of manual math involved, as the cost basis of the base property will be reduced by the amount of prior depreciation already taken, and the 27.5-year depreciation cycle starts over from year one. Additionally, any property improvements done during the "downtime" add to the cost basis." I am not sure I fully understand this, if we turn this into personal property, and later reinstate it for rentals, you mention the depreciation cycle starts over from year one. So does that mean we would have another 27.5 years to depreciate the building even if the cost basis is reduced?
Thank you so much for your assistance.
Thank you for your response, it is definitely appreciated. The potential reason for not renting is mainly Covid. Our property is a rather close-knit group (one Victorian house, 3 apts) and we live in one. We are at high risk, cannot afford to contract Covid. The moratorium on evictions is also a factor, although it is ending, who knows it might be reinstated. It hasn't helped the Mom and Pop type of landlords, we wind up with not only paying the mortgage without compensation but the power, water, sewer, etc. as well. So we are thinking it would be better to not rent until Covid is passed. Our area is currently in the highest infection rate. But, we could easily do repairs and improvements during that time, or turn it into personal use. Every room in the building can be accessed from apt to apt. So we are looking to determine what will be the best financial and health decision before we "change". At this point, we are looking at one year and then will reassess.
Thank you for your assistance.
...So does that mean we would have another 27.5 years to depreciate the building even if the cost basis is reduced?
Yes. When you take residential rental real estate out of service and then place it in back in service, your recovery period (27.5 years) starts over.
Of course, generally, your basis for depreciation will be reduced.
Ok ... in your situation where you could and would rent the units when and if it is safe for you to do so AND you are not using the units personally then I would consider them to still be rental properties and would still carry the expenses on the Sch E ... keep good records of your situation in case the IRS were to ask however since the covid situation many landlords have reduced income from the rentals so allowances are sure to be made.
.....AND you are not using the units personally then I would consider them to still be rental properties....
I concur with the foregoing and, technically, the units could be considered "available" with certain contingencies (such as testing, vaccinations, et al).
Thank you for your response. Our attorney feels we could require vaccinations from renters, and masks, etc. due to health conditions. But as she mentions the California law changes frequently in regards to tenants. All of your answers are helpful. It gives me a better "handle" on what path we might take.