How to convert a duplex rental unit to primary residence after 19 years showing as one property in Turbo Tax? CPA began it as one property.

[HappyDayAgain]

After 19 years of renting both sides of our duplex, one side became our primary residence in August 2020. Our CPA set the rental up as a single property with both addresses showing for the property as "A" and "B" all those years ago. All through the years, I have simply combined the incomes and expenses for the property reporting and all seemed to work just fine. Now, I know the personal side needs to be reported for personal use as our primary residence.  I don't know whether I should try to separate this property into two different properties within Turbo Tax by dividing the depreciation between the two or if it can be done this way in Turbo Tax. How do I show this property as two separate addresses at this point?  Any help on this topic would be greatly appreciated.

[Carl]

Our CPA set the rental up as a single property with both addresses showing for the property as "A" and "B" all those years ago.

That comment doesn't make sense to me. So take a look at your 2019 SCH E and tell me what you have. If you have "A" listed under column A of the SCH E, and "B" listed under column B, then it was reported as two physically separate properties on your 2019 tax return. You simply convert one of them (the one you're living in) from rental to personal use.

Otherwise, if you only have a single property listed under column A, and the other columns are blank, then we have to take a different route.

[HappyDayAgain]

We have to take the different route because everything is in Column A.

[Carl]

Okay. Lets see if we can still shorten this process. Work through the rental and elect to start/update the Assets/Depreciation section. Do you have each unit listed separately in the assets/depreciation section?

If all you have is a printout of your 2019 tax return, then take a look at the 4562's for that rental property. You will have two IRS Form 4562's for that property and they will both print in landscape format. One is titled "Amortization and Depreciation Report" and the other is titled "Alternative Minimum Tax Depreciation Report". Take a look at the first one. Is each individual rental unit listed separately on that 4562?

[HappyDayAgain]

I'm familiar with the Depreciation Report and all the depreciation is listed as one property.  It's always been treated as one property. We have simply added the incomes and expenses together to report as one property all these years. The address shows as this format on the Schedule E: ####A & B Street Name

[Carl]

Darn! I was hoping for at least a split on the 4562. Oh well. Here's a gist of the process, which I'll be happy to walk you through if you like. I am also assuming a 50/50 split of all expenses and depreciation between the two units. If the actual rental income is different for each unit, that really doesn't matter. It's the expenses, depreciation and property taxes that I am expecting (hoping) is a 50/50 split. (or will be 50/50 once this process is completed.)

Start by entering the property so that you report it exactly as it was reported on your 2019 tax return. Take note that you will only enter rental income received from both units up to the date the renter moved out of one of the units. You'll be converting the entire property to personal use, one day after that renter moved out. So make sure you read every word on every screen so that you make the necessary selections.

You will also need to prorate your mortgage interest and property taxes. Make sure you do "NOT" elect the option to have the program do the splits for you. If you do, then because of your unique situation, the program will not so those splits correctly in the end.

If you show a conversion date of July 31, 2020, then you'll be entering 7/12 of the property taxes paid, and 7/12 of the mortgage interest paid. Don't worry about the depreciation. The program will take care of that for you, based on the date you convert it to personal use.

Next, you will enter an entirely new rental property with an in service date of Aug 1, 2020. This is where the math you need to manually perform comes into play.

As you enter the property in the Assets/Depreciation section, in the COST section you need to figure the correct number to enter here. This is your formula for getting the correct number.

Look at the 2019 form 4562, Depreciation and Amortization report.

1/2 of the amount in the "cost (net of land)" column, plus 1/2 of the amount in the "land"  column. Add those two amounts together.

Now subtract from that total 1/2 of the amount in the "Prior Depreciation" column and write down the new total.

Finally, subtract 1/2 of the amount in the "current depreciation" column, and enter theis final total in the COST box in the TTX 2020 program.

Next, enter 1/2 of the amount in the "land" column, in TTX 2020 "cost of land" box.

With this setup, you've taken into account the prior depreciation already taken on the unit that will remain classified as a rental. Additionally, since this is a change in status, depreciation will start all over for the unit that remains a rental, based on the reduced cost basis you just figured.

Also, still assuming a 50/50 split, this will be the cost basis of the unit you live in now, should you ever sell it, convert it back to a rental in the future, or if you tne owner of that unit should die.

In the end, you will have two entries on the SCH E. Column A will show the duplex consisting of both units being rented out up to July 31, 2020. Column B will show only a single unit being rented out effective Aug 1, 2020.

[HappyDayAgain]

Thank you so much for the very precise directions to set this up for the "status" change within TurboTax! 

So, to clarify, column A will continue to represent the rental side of the duplex but it will have,in essence, half divided amounts for the cost of the asset, land, prior depreciation and current depreciation numbers currently listed. Column B will represent the owner-occupied side for the August 1, 2020 date going forward.  When you say, "Additionally, since this is a change in status, depreciation will start all over for the unit that remains a rental, based on the reduced cost basis you just figured."  Do you mean that it will begin the 27.5 year depreciation all over? We may sell this property in a few years and I am wondering if it will all work the way it should.

Would I go through the same process for a roof which was set up for depreciation in 2017?

[Carl]

So, to clarify, column A will continue to represent the rental side of the duplex

I think what you said and the way I am interpreting it is not the same. If you enter things in the order I stated, column A will represent the entire property (both units) as a rental up to July 31, 2020. Then column B will be the single rental unit from Aug 1, 2020 through the end of the tax year. The side you started using as your personal residence is "NOT" on the SCH E anywhere, for the period of time it was your personal residence.

Do you mean that it will begin the 27.5 year depreciation all over?

Yes, exactly. But you will be depreciating a "reduced" cost basis that takes into account the prior depreciation already taken on that specific rental unit, which basically remains a rental unit.

We may sell this property in a few years and I am wondering if it will all work the way it should.

That's why it's important that you keep track of "all" depreciation taken on the property. The 4562 for column A will show the total depreciation taken on the property since you owned it, up to July 31, 2020.  (current depreciation, plus prior depreciation) Then the 4562 for column B will show the depreciation taken on the unit that remains a rental, from Aug 1, 2020 through the rest of the year. If you sell the property in the future, you will need to report the "total" of "all" depreciation taken on the property on your tax return, in the tax year you actually sell the property. SO make sure to store a hard copy printout of your 2020 tax return in a safe place. I can assure you that you will need the information off those 4562's when any one of three things happens in your life

1) You convert a unit (personal to rental, or rental to personal)

2) You sell the property, or any portion thereof.

3) You die.

Would I go through the same process for a roof which was set up for depreciation in 2017?

Yes, assuming you re-roofed the entire structure in 2017. Remove it from service (convert it to personal use) on the same date you removed the primary structure from service. Then enter the roof as a completely new asset. Cut the cost basis in half to represent only the remaining rental unit. Then subtract from that, half of the depreciation already taken on that specific asset. That will give you your new adjusted cost basis on the roof. Enter that asset and depreciation starts anew on Aug 1, 2020 over the next 27.5 years.