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Tara99
Level 1

Is depreciation for 27.5 or 30 years for a residential property? Can I take depreciation after that time if I've renovated or repaired the home?

It's hard finding clear answers online about depreciation, so I'm asking here.   

 

I thought after we've rented a home for 27.5 years, then it can no longer be depreciated. Is that right? But in some places I read it was 30 years. 

 

My parents bought a home we lived in for several years, and then we moved out, and my parents then continuously rented the home. So does the depreciation start when they started renting the home, not when they bought the home for them and their kids to live in?

 

The home was passed over to me several years ago, and it's continued to be rented. Is the depreciation the same, though it's changed hands? They didn't sell the home but passed it down to me. 

 

I heard that depreciation can still be taken for a home if we've made capital improvements on it. Does that include renovations and repairs? Can you explain this some more?

 

Also, is depreciation another way to reduce tax if we have a rental property? I've read various stuff online that seems like depreciations is optional and not necessarily a good thing for owners. 

4 Replies
Anonymous
Not applicable

Is depreciation for 27.5 or 30 years for a residential property? Can I take depreciation after that time if I've renovated or repaired the home?

you can own a home for 100 years and if in year 101 you start renting it that's when depreciation starts.  27.5 years for residential real estate property placed into service in 2019 (the land portion is not depreciable).  use the lower of cost or Fair Market Value on the date it was put to rental use.    over the years the life for rental property has varied greatly.  at one time there was no specified life in the code.  then ACRS  came in which specified the life for real estate.  then the ACRS life was lengthened. Now we have MACRS  which allows use of either the GDS or ADS life (see PUB 946). depreciation is allowed under code sections 168 and 179

I don't recall real estate ever having a 30 year life but maybe that was or is the case for foreign-based rental property.  39 years is the GDS standard now for commercial real estate. 

 

 

My parents bought a home we lived in for several years, and then we moved out, and my parents then continuously rented the home. depreciation starts when they started renting the home

The home was passed over to me several years ago, and it's continued to be rented. Is the depreciation the same, though it's changed hands? They didn't sell the home but passed it down to me. how was it passed to you?  if as a gift then your basis is determined as follows:

If you hold the gift as business property (rental property would be business property), your basis for figuring any depreciation deduction is the same as the donor’s adjusted basis (their cost reduced by the larger of the depreciation they took or should have taken under the tax laws in effect when they put it up for rental) plus or minus any required adjustments to basis while you hold the property. (see IRS PUB 551)

if you inherited the property the depreciable basis would be the date of death value reduced by the DOD value of the land 

 

I heard that depreciation can still be taken for a home if we've made capital improvements on it. Does that include renovations and repairs? Can you explain this some more?

any repairs would be an expense in the year paid.  capital improvements would be depreciated from the date they were put into service over 27.5 years. 

 

Also, is depreciation another way to reduce tax if we have a rental property? I've read various stuff online that seems like depreciations is optional and not necessarily a good thing for owners.

 

you must take depreciation using the proper life and method.  the tax laws state that when you sell the property (if you ever do) you must compute the gain or loss using the larger of the depreciation you have taken or should have taken. ignoring the land for a moment, if you were to rent the property for  28 years but not take any depreciation on the building which had a basis to you of $100,000, and you were to sell it for $100,000 you would have a $100,000 taxable gain.

 

 

to complicate matters if it was a gift there's a special way to compute gain and loss. it's in PUB 551

If the FMV of the property at the time of the gift
is less than the donor's adjusted basis, your basis depends on whether you have a gain or a
loss when you dispose of the property. Your basis for figuring gain is the same as the donor's
adjusted basis plus or minus any required adjustment to basis while you held the property.
Your basis for figuring loss is its FMV when you
received the gift plus or minus any required adjustment to basis while you held the property
If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the
FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property.

 

 

Tara99
Level 1

Is depreciation for 27.5 or 30 years for a residential property? Can I take depreciation after that time if I've renovated or repaired the home?

Let's say I spent $10,000 on improvements and the rest on repairs last year. I know it's confusing what's a repair and what's an improvement, too. Is the small amount of depreciation on the improvements worth all the hassle? It's just a small percentage, right? And we'd take the depreciation on that improvement every year for 27.5 years, right?

Carl
Level 15

Is depreciation for 27.5 or 30 years for a residential property? Can I take depreciation after that time if I've renovated or repaired the home?

The home was passed over to me several years ago, and it's continued to be rented.

Exactly "how" was is passed to you? It matters for depreciation.

Did the original owner pass away and you inherited it? Did the original owner give it to you as a gift while they were still alive? Did you pay or compensate the original owner in any way, shape, form or fashion in exchange for the proeprty?

They didn't sell the home but passed it down to me.

How and when it was passed to you, matters.

So does the depreciation start when they started renting the home, not when they bought the home for them and their kids to live in?

For "YOU", neither. Depreciation starts for "YOU" when the property was placed in service. But the start date of that depreciation depends specifically and explicitly on how you acquired ownership of the property, and when.

I heard that depreciation can still be taken for a home if we've made capital improvements on it.

Depending on how the reader interprets the above statement, it could be true, false, or both at the same time.

Does that include renovations and repairs? Can you explain this some more?

I would highly suggest you read IRS Publication 527 at https://www.irs.gov/pub/irs-pdf/p527.pdf It covers practically anything and everything concerning long term residential rental real estate.

Meanwhile, we can help you with "your" "specific" "situation" if you can provide more detailed information on what your specific situation is, as I've pointed out above. Otherwise, if we cover all possibile situations that we "think" apply to you, you'll most likely get even more confused from the "information overload" of information that doesn't apply to your specific situation.

In the meantime, here's some basic data that may (or may not) apply to your situation.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2nd home before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

Anonymous
Not applicable

Is depreciation for 27.5 or 30 years for a residential property? Can I take depreciation after that time if I've renovated or repaired the home?

here are safe harbor discussion

Safe Harbor for Routine Maintenance
You are not required to capitalize as an improvement, and therefore may deduct, amounts that meet all of the following criteria:

Amounts paid for recurring activities that you expect to perform;
As a result of your use of the property in your trade or business;
To keep the property in its ordinarily efficient operating condition; and
You reasonably expect, at the time the property is placed in service, to perform the activities:
For building structures and building systems, more than once during the 10-year period beginning when placed in service, or
For property other than buildings, more than once during the class life of the unit of property.
If the amount doesn't meet all of the requirements for the routine maintenance safe harbor, you may still deduct the amount if the amount is not for an improvement under the facts and circumstances analysis.

For more information about class life, refer to Appendix B of Publication 946 which includes class life, recovery periods, and a glossary of terms.

What are the most important exceptions from and inclusions in the routine maintenance safe harbor?
The routine maintenance safe harbor doesn't apply to amounts paid for betterments.
The routine maintenance safe harbor does apply to certain restorations that would otherwise be improvements, including when you pay amounts to replace a major component or substantial structural part of a unit of property.

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