foreign rental property depreciation 30 yrs vs 40 yrs

[Xin123]

Hi,

I would like get some advice on foreign rental depreciation. I have a foreign rental property purchased in 2017 and made some renovation before I put in rental in 2017. The house itself and renovation cost have been depreciated by 40 yrs ADS during the past few tax season using turbo tax. In 2021, I made some other renovation and incurred some cost that I need to start depreciating in 2021. when I started file my 2021 tax, turbo tax uses 30yrs depreciation life for the renovation costs incurred in 2021. I am wondering if the renovation cost incurred in 2021 should be depreciated with 40 yrs or 30 yrs life? even the house itself will still be depreciated with 40yrs life.

Any help is very appreciated

[Critter-3 · Accepted solution]

Your overseas property is depreciated over a 30-year or 40-year period, depending on when it was first rented, instead of the 27.5 years for domestic residential properties.  *Prior to 2018, depreciation of foreign residential property was limited to 40-years.   New assets placed in service now get the lower 30 year period.

[rpa2]

Do you have the IRS publication number where I can see that? I went through the 527, 946, and 536 and I could not find anything. Any help will be very appreciated.

[Carl]

See IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf  On page 33 of that document at the top of the 2nd column it lists Residential Rental Property at 30 years. You'll note there's a subscript "1" for that line. Reading note 1 states it's 40 years for property placed in service before Jan 1, 2018. So your property improvements that are classified as residential rental real estate that were placed in service on or after Jan 1 2018 are depreciated over 30 years.

[rpa2]

Thank you for the information.
I don't have deep knowledge about rental depreciation and I could be completely wrong, as it is the first time I am doing my taxes myself after living in the USA for almost 30 years.
From what I understand, I believe that the table on page 33 of publication 946 applies to the ADS (Alternative Depreciation System).
What you are trying to say is that the depreciation system that must be used for rental outside the USA should be ADS and not (GDS) General Depreciation System due to the fact that it must be 30 or 40 years of depreciation depending on the date when it was posted in service.

On page 9 of publication 527 it mentions in the third paragraph under “Electing ADS, that this system can only be used for a rental property if it is elected in the first year that the property was put into service.

In my case, my account, in the first year of service (2015) decided to use (GDS) General Depreciation System, and in this case, then: 1. should I switch to ADS system? 2. how can I do that?
Table 2-1, on the same page, shows how many years of depreciation apply to the GDS and ADS.

I still haven't found any instructions or publications from the IRS where it CLEARLY mentions what the depreciation system is and how many years it should be used to oversee rental property.

This is really what I would like to see. Perhaps someone from the Turbotax team should shine some light on this topic.

[Critter-3]

Once you start a depreciation method you cannot just switch to another without IRS consent.  Please seek professional guidance if this subject matter still confuses you.

[Carl]

The bottom line is this:

Long term foreign residential rental real estate placed in service on or before Dec 31, 2017 is depreciated over 40 years.

Long term foreign residential rental real estate placed in service on or after Jan 1, 2018 is depreciated over 30 years.

The change took place with the Tax Cuts and Jobs Act of 2017 that was passed into law in January that same year. You can read it at https://www.govinfo.gov/content/pkg/BILLS-115hr1enr/pdf/BILLS-115hr1enr.pdf

[rpa2]

Thanks for the BILL – 115hr1enr.
I read it over and I believe the only pages that talk about depreciation are pages 57 and 58. However, they don't mention anything specific about residency outside the US.

My account that did my taxes when I place my rental house in service depreciated it using GDS system and a recovery time of 27.5 years.

The only way I have to convince him to fix his mistake will be to find a document from the IRS that clearly shows that foreign residential rental real estate placed in service on or before Dec 31, 2017, must be depreciated using ADS system using a recovery period of 40 years.

Appreciate any help.

Thanks

[Carl]

That's in pub 527 at https://www.irs.gov/pub/irs-pdf/p527.pdf

Page 9, Table 2-1.  Note the table shows 27.5 years under GDS and 30 years under ADS. Note the superscript "1" for the 30 years. Referring to note 1 below the table states 40 years for property placed in service before January 1, 2018.