How is existing depreciation (related to purchased improvements) treated during renovation for a rental property that was first rented, then renovated, then rented again?

[Topangamama]

That makes sense, thank you for clarifying.  I'm in the process of amending my 2019 return and want to add the cost of improvements to the Cost Basis of the house.  When I get to the screen that asks how I would categorize this asset, would I choose "residential rental real estate" and then describe it on the next screen as "property improvements"?  What would I put for the date purchased if I'm consolidating multiple purchases?  We also replaced all the appliances over time, so the question applies here as well.

[AmyC]

@Topangamama  I just did an example for you in another thread and now see this one. Ok, so did you start renting the house in 2019? You need to save a copy of the original return.

Then go in and change the basis of the house. You don't add another column of items. You simply change the basis of the house. 

Go to your asset summary, edit the house, change the basis. Finish amending return.

[Topangamama]

Well that certainly simplifies things!  Yes, we did start renting the house in June 2019, so I will change the basis when I amend the return.  Thanks for your help.

As we continue to repair/update the house (while rented), would we then add assets to depreciate (if the amount is over the De minimis safe harbor amount)?  Does TT have the ability to designate a specific property class under GDS?

[DawnC]

Yes, you would add assets to the property when you do improvements; they will be capitalized and depreciated.   You can expense the repairs.    @Topangamama

You are allowed to depreciate real estate over a longer time period:

• 27.5 years (residential rental properties)
• 39 years (commercial buildings)

Land is not depreciable (it doesn't wear out), but land improvements such as roads, sidewalks or landscaping may be written off over periods of 10, 15 or 20 years depending on the specific nature of the asset.

The default MACRS depreciation method gives you a bigger tax deduction in the early years, while the asset is still new, and a smaller deduction towards the end of the asset's useful life.

Because most business property is depreciated with MACRS, that's the method that TurboTax applies by default. However, you can apply straight line depreciation if you want. In fact, straight-line is the only option available for intangible assets, which can't use MACRS nor Section 179.

CAUTION Switching to straight line depreciation requires a comprehensive knowledge of depreciation methods, asset classes, and recovery periods. Even tax experts can get confused. For this reason, we advise against switching unless you are absolutely sure you know what you're doing.

Tax Deductions for Rental Property Depreciation

Asset classes, recovery periods, and instructions can be found in Appendix B, which starts on page 98, of IRS Publication 946, How to Depreciate Property. Even though this publication is labeled 2019 the IRS has provided updates for 2020 and this is the guide to use.   We'll figure out which asset class and recovery period applies to your asset.

[Topangamama]

Thank you @DawnC, I will stick to the TT default method.

[Carl]

When Amending the return to correct the cost basis of the structure in the first year it was placed in service, one can easily get confused because of the way the program figures you're cost basis on the structure. (which is in line with the way the IRS wants it figured).

Simply increase the amount in the COST box by the appropriate amount, and do not change the amount in the COST OF LAND box.  The program will "do the math" to get the cost of the structure.

Note that if you've already started or filed the 2020 tax return, then you'll have to amend it to manually correct the cost basis and the prior year's depreciation manually.

Otherwise, if you start your 2020 return after amending the prior year return, ensure that you import from the amended return, and not from the original return. Otherwise, cost basis and depreciation will be wrong.

[Topangamama]

Thanks, perfect.  I did already start my 2020 return based on my original 2019, do I just change the cost and the prior depreciation numbers to reflect the amended return on the "review information" screen?  I was afraid I would have to start over...

[Carl]

I did already start my 2020 return based on my original 2019

You can't change anything on a "review" screen. But you should be able to just work through the asset in the assets/depreciation section and update the cost basis manually there. Assuming 2019 was the first year the property was rented, getting the correct prior depreciation taken to be the correct amount on the 2020 return should be rather easy.

[Mattcampa]

But can I deduct depreciation as a active income even though Im not a real estate professional? If not how could I do so?

[Carl]

Depreciation has nothing to do with being an RE Pro.

Depreciation starts on the date the property is placed "in service". This is generally the day you put the FOR RENT sign in the front yard. It's the first day a renter "could" have actually moved in.  Depreciation is required by law. Your nor I have any say in it.

Keep in mind also that depreciation is not a permanent deduction. At some point in time (usually when you sell the property) all prior depreciation taken on the property is recaptured and taxed in the year of the sale. Again, we don't have a say in this, as it's the law.

For property improvements, you don't even enter them into your tax return until the tax year they are actually placed "in service". So for example, say you put a new roof on the property in 2017and paid for it in that same year. But because of other ongoing renovations the property remained vacant until 2018 when the other improvements were completed. So "that roof" was not in service at all in 2017 and would not be entered at all on your 2017 tax return. You'd enter it on the 2018 tax return included with all the other property improvements you did.

[Carl]

My response updated above. This post is just to ensure you're flagged and can re-read it.

[tagteam]

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@Mattcampa wrote:

But can I deduct depreciation as a active income even though Im not a real estate professional? If not how could I do so?

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If you are not a real estate professional who materially participates in your rental activity, then you are subject to the passive activity loss rules; rental income is passive in most instances. 

However, you can still deduct depreciation from your rental income despite the fact that the rental income is passive.