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chugach
New Member

How do you calculate depreciation on a property that was rented out 25 years, then occupied by owners for 2.5 years, and then converted back to rental?

The rental property was depreciated for 25 years and then converted to primary address. Now it is rented again but how do you treat the depreciation on your taxes?

1 Reply
Coleen3
Intuit Alumni

How do you calculate depreciation on a property that was rented out 25 years, then occupied by owners for 2.5 years, and then converted back to rental?

If it was not rented in 2017, you would need to enter it under sale of home and then enter the depreciation amount when asked if you have ever used the house for business purposes. You will have to manually enter the depreciation amount.

If it was rented in 2017, you would enter it in the rental section. The depreciation will be included. There will also be a place for you to indicate the personal use.

If this house was a rental home or investment property -  

It depends on your rental activity during the year:

  • Under the rental section - if rented during 2017
  • Under the sale of business property - if not rented during 2017

Additionally, when you sell a property that was used as a rental, you must pay tax on the depreciation you claimed. (Remember the IRS will assume that you claimed the correct amount of depreciation every year—this is true regardless of whether you actually claimed any depreciation on your tax return).

In order to calculate the capital gain or loss when you sell a residence that had been converted to rental property, you need to know three things:

  • Your adjusted tax basis in the property (both at the time of the conversion and the time of the sale)
  • The sale price
  • The fair market value of the property when it was converted to rental property

If the converted property is later sold at a gain, the basis for purposes of determining the capital gain is your adjusted tax basis in the property at the time of the sale. If the sale results in a loss, however, the basis used is the lower of the property's adjusted tax basis at the time of the conversion or the fair market value when the property was converted from personal use to rental property. This loss rule ensures that any deflation in value occurring while the property was held as a principal residence does not later become deductible upon your sale of the rental property; a loss on the sale of a principal residence is not deductible. As usual, you calculate your capital gain by subtracting your adjusted basis from the sale price of the property.


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