How do I report a rental property that is in the process of converting it to primary residence?

[flattax2]

I have a rental property that has been rented for several years with profit. Last year (2018), we did not rent it. Well, did try but did not find a tenant. Later that year we tore it down and have been rebuilding  as primary residence.  We will sell our current home and move into this one when it is done some time this year. How should I report it in 2018? I feel we should not report it as rental for the year to avoid one year more prorated rental and depreciation recapture in the future when we sell it as primary residence. Am I right? Thanks.

[KrisD · Accepted solution]

You will need to report that you disposed of the rental in 2018. 

Under "Property Profile" in the rental section, Select "I converted the home from a rental to personal use in 2018."

On the next page select "No, this property was not rented all year." and enter the number of days it was available for rent (even though you did not find renters). Yes, depreciation will be calculated up until the date you decided to convert it.

Enter the expenses incurred up until you stopped using it as a rental. 

Go to the Assets section and delete the land, building and any additional assets related to the rental. 

This will also remove the worksheets from next year's return. Be sure to save your file so you know what to claim when you need to recapture the depreciation. 

Additionally, if the home will be financed, make sure the loan is secured by this property (not a HELO on the other house) if you want to claim the home mortgage interest.