Landlord Renter Question

[Woodman228]

Are there any concerns if renters take a pause due to COVID liability and concerns and skip a year?    In the scenario below, in Year 2021 Schedule E would not be applicable, then reopen in 2022.

Year 2020.    Rented out home.

Year 2021.    Did not rent home due to COVID liability.

Year 2022.    Rented out home.

[MinhT1]

You can take a pause in your rental activity.

If your rental home is not available for rent in 2021, then there is no rental activity to report in 2021.

[Carl]

Here's how this would work.

On Dec 31, 2020 (the tax year you're working on right now) convert the property and all it's assets to personal use. This does several things.

2020 Taxes

- Depreciation stops on all assets on Dec 31, 2020.

- All rental expenses incurred in 2020 are fully deductible on SCH E on your 2020 tax return.

- You will need to print out both of the IRS Form 4562's as well as the 8582 from your 2020 tax return for that property. You will "NEED" those forms when you make the property available for rent again, in 2022.

- The 8582 is only generated if you have any carry over losses. Due to a change in the law in 2018, it's perfectly possible you will not have any carry over losses. Therefore, no IRS Form 8582 would be generated for that rental property.

- If you have been amortizing points, then when you show the conversion to personal use any remaining points to be amortized will be fully deductible on the 2020 tax return.

Then for the 2022 tax year.

- You will not report anything concerning this property on SCH E at all. If it's the only rental property you have, then no SCH E will be filed at all with the 2021 tax return.

- The only deductible items concerning this rental property on your 2021 return is property taxes and mortgage interest. That's it. Period. They will be a SCH A itemized deduction.

- No other "ordinary" expenses you incur on this property in 2021 will be deductible anywhere on your tax return, ever. (Do not confuse this with property improvements, which are not "ordinary" expenses.)

-If the total outstanding mortgage balance of all of your mortgages on  non-business real estate exceeds $750,000, then you will be limited in the amount of interest you are allowed to itemized on the SCH A.

- The maximum amount of all SALT (State and Local Taxes) you can claim as an itemized deduction on SCH A is $10,000. So if the total of all property taxes and any other state and local taxes exceed $10,000, you will be limited on the deduction for that as well.

For the 2022 tax year

- When you convert the property back to a rental on 1/1/2022 you must reduce the cost basis of all assets by all prior depreciation taken and depreciation starts over with the new reduced cost basis, from year one.

- Since all your points were deducted on the 2020 tax return when you converted the property to personal use, you have no remaining points to be amortized. Therefore, there will be no entry in the assets/depreciation section for that.

- You will have to manually enter any carry over losses from the 2020 return, as shown on the form 8582 from that tax year. (That is, assuming you actually have any carry over losses, as it's perfectly possible you will not.)

[Woodman228]

Thank you for the quick reply

Can I go back today and declare personal use?

Depreciation in 2022.    Will this cause a tax liability in my taxes or how will this effect my tax return in 2022?  2021?   Do I have to enter this manually in TTax?    

Thank you

[Woodman228]

Thank you for the quick reply

Can I go back today and declare personal use?

Depreciation in 2022.    Will this cause a tax liability in my taxes or how will this effect my tax return in 2022?  2021?   Do I have to enter this manually in TTax?    

[Carl]

Can I go back today and declare personal use?

Are you asking this because you've already e-filed your 2020 tax return, and it's been accepted by the IRS? If yes, then you'd be better off converting it to personal use on 1/1/2021 when you file the 2021 tax return next year. That would stop depreciation on 1/15/2021 or thereabouts, since the mid-month convention is use on residential rental real estate. Then you'd be including the SCH E in your 2021 tax return for the sole and only purpose of the conversion. Doesn't change anything else covered previously, about the 2021 tax year, as you'd have no rental income or expenses to report on the SCH E for 2021 at all.

Generally, you only amend a tax return if doing so will make a difference in your tax liability. Amending the 2020 return merely to convert the property to personal use on Dec 31 will not change your 2020 tax liability by a single penny. So not worth bothering with really.

[Woodman228]

Do I have to make it personal use or just not rent it out?    I don't want to change my depreciation since homes have increased.    Thanks!!

[Carl]

If you did not rent or attempt to rent the property in 2021, then you want to convert it to personal use to stop depreciation.

Remember, you are required to recapture depreciation in the tax year you sell the property, and pay taxes on that recaptured depreciation. Additionally that recaptured depreciation increases your AGI and has the potential to bump you into the next higher tax bracket.

In my opinion (and we all know what opinions are like.) you want to keep your depreciation as low as you legally can. What you may "save" now, will cost you you the future, and could cost you more later, than what you may save now.

When you place the property back in service in 2022, your new cost basis will be the old cost basis (on the structure and other depreciated assets only, not the land.) minus the prior year's depreciation already taken. Then depreciation starts anew for the next 27.5 years from the new, lower cost basis.

[Woodman228]

So to make sure I understand, I use the original depreciation numbers when I purchased the house when it goes back to the rental in 2022?     Do I do any new calculations on 27.5 years.....its been on the market for 10 years so do I use 17.5 or 27.5 in 2022?

Thank you

[Carl]

You're reading information "between the lines" that just flat out is not there to be read.

Here's an example:

Purchased rental property in 2010 for $100,000 with $30K allocated to the land. Property placed in service on 1/1/2010.

COST: $100,000

COST OF LAND $30,000

The program (not the user) does the math and assigns $70,000 to the structure. That $70,000 gets depreciated over the next 27.5 years.

On December 31, 2020 I convert the property to personal use, as starting on Jan 1 2021 I do not rent or attempt to rent out the property for the entire tax year, or longer. At this point I have taken$27.893 of depreciation on the structure.

On Jan 1, 2022 I place the property back in service as a rental and begin advertising. I will enter a completely new rental property *AS* *IF* I never, ever, ever, ever, rented it out before, with the adjusted cost basis to account for the depreciation taken previously.

COST: $72,107 (Original cost of $100,000 minus the $27,893 of depreciation already taken)

COST OF LAND $30,000 (Land is not a depreciated asset. Therefore the cost of the land will not change)

Date place in service: Jan 1, 2022

The program will figure depreciation based on a structure cost basis of $42,107 over the next 27.5 years, with Jan 1, 2022 being the first year of the next 27.5 years.

[Woodman228]

Thank you for the detailed replay.....that really helps!!