Primary Residence to Rental

[klong52]

Good morning,

So, I purchases a home in July of 2020 in NC. In April of 2021 I moved in with a coworker while looking for another job and was offered a Job in TN. I put my home for rent in May of 2021 and was rented until I sold my property in October of 2021. I sold the home since I moved out of state for a job. Based on the partial exclusion, I know that I don't have to pay taxes on the gains on the sell of the property, my question, is mostly in regards to depreciation and all of those fun things that go along with renting out my first home. For about 5 months it was rented until I sold the home. Any help on the depreciation issue?

Thanks!

[Critter-3]

No depreciation is allowed or required when the property was put into and taken out of service in the same tax year ... simply skip that section. 

[barrons185a]

Hello, Critter-3.

Can you point me out to the IRS instructions or publications that do not allow depreciation for property placed in service and taken back out in the same tax year?

I have a similar situation for last year on a rental of a personal residence, but I intend to continue to rent it this year and in future years.

Maybe you are only referring to the situation where a sale occurs in the same year, which makes sense.

My concern is what another commentator pointed out ...

Internal Revenue Code Section 1250 states that depreciation must be recaptured if depreciation was allowed or allowable. So, even if you don't claim the annual depreciation expense on rental property that you're legally entitled to, you'll still have to pay tax on the gain due to depreciation when you decide to sell.

https://learn.roofstock.com/blog/rental-property-depreciation-recapture 

[Critter-3]

Maybe you are only referring to the situation where a sale occurs in the same year, which makes sense.  BINGO.  If you try to enter this in the program it will reject the entry.  

The rule for depreciation is it must be taken if the asset  has a useful life of more than one tax year ... since you put it in and out of service in the same tax year it did not have a useful life of more than one tax year.  

[Carl]

As an addendum to the other comments in this thread, be aware that for your partial capital gains exclusion, recaptured depreciation is not included. You *will* pay taxes on the recaptured depreciation, no matter what.

[AmeliesUncle]

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@Critter-3 wrote:

No depreciation is allowed or required when the property was put into and taken out of service in the same tax year ... simply skip that section. 

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I don't that is true for real estate.  And the last I checked, the program DOES allow it for real estate.

The Regulation that states that rule is for the mid-month and mid-quarter convention.   So that Regulation would not apply to real estate, which uses the mid-month convention.

[Critter-3]

Ok 30 years in the business, 27 as an enrolled agent and 8 years TEACHING the income tax prep courses makes me an expert in this field.   But if that is not enough ...  see chapter 1 of Pub. 946.

You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. You can also depreciate certain intangible property, such as patents, copyrights, and
computer software.
To be depreciable, the property must meet all the following requirements.
• It must be property you own.
• It must be used in your business or income-producing
activity.
• It must have a determinable useful life.
• It must be expected to last more than 1 year.

Excepted Property
Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following
property.
• Property placed in service and disposed of in the
same year. Determining when property is placed in
service is explained later.
• Equipment used to build capital improvements. You
must add otherwise allowable depreciation on the
equipment during the period of construction to the basis of your improvements. See Uniform Capitalization
Rules in Pub. 551.
• Section 197 intangibles. You must amortize these
costs. Section 197 intangibles are discussed in detail
in chapter 8 of Pub. 535. Intangible property, such as
certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. See Intangible Property, later.
• Certain term interests.

[AmeliesUncle]

If you can show me that in any authorities guidance (Regulations, Notices, etc.), great.  But I have looked, and I have seen NOTHING that says it applies to real estate.

The only place I have seen it is §1.168(d)-1(b)(3)(ii), which does not apply to real estate.

And as I mentioned above, the last I checked the program agrees with me - it does give depreciation for the real estate.

Realistically, it has little or no effect due to claiming depreciation then paying the Unrecaptured Section 1250 Gain in the same year.  But as far as I can tell, depreciation is still required.