Converted 2 bedroom rentals to full house rental confusion

[skonvalin12]

Hi there,

Just looking for some help and hopefully my tax situation will get smoother for the 2020 tax year.

I lived in my home for six years and at any given time I was renting out 2 of the 3 rooms. In the middle of 2019 I completely moved out and converted the whole home to a rental.  The two spare rooms had remodeling done to them in 2019 so I didn't have any tenants before I moved out.  Looking for help with how I put this in Turbotax, I didn't really convert from personal to rental and I didn't use the whole home for personal use for half the year. The two spare rooms have been on my tax forms before.

Any help would be greatly appreciated.

[RobertG]

You should treat it as if you converted the rental to personal use in 2019, then converted it to a rental. 

Unless you sold the property there is nothing for you to report on the tax return if you converted the property from a rental to your personal primary residence.  So you do not need to report a disposition of the two-bedroom rental previously reported on your return. 

Then you simply report it as a  property on your 2019 return that was converted from personal use.  Any depreciation previously claimed will reduce your depreciable basis in the property. 

[Carl]

Assuming all of this occured in 2019.

First, you will convert your existing rental (which is for the room you rented) back to personal use.  After you do that, work through the rental again and you will "NEED" to write down the following information.

Prior year's depreciation taken

Current year's depreciation for 2019

Add those two numbers together to get the total depreciation taken while you were living in it and renting out rooms.

Next, you will enter a *NEW* rental property. 

You must reduce your cost-basis on this new entry by the amount of all depreciation taken on this property. You will only reduce the cost basis of the structure and any other assets you may have taken depreciation on before. For the property itself, you will not under any circumstances reduce or change the "Cost of Land" amount. Example:

When you lived in it and rented out rooms.

Cost $200,000

Cost of Land $50,000

That means the structure was valued at $150,000. So if you rented out 1/3 of the floor splace, then $50,000 was the cost basis used to figure depreciation year-to-year you had that space rented out. So lets say you rented it for 5 years and have taken a total of $10,000 of depreciation.

When you convert the entire house to a rental here's what you'll enter for your costs.

COST $190,000  (Original cost basis minus the $10K of depreciation taken already)

Cost of Land $50,000 (the value of the land does not change, since land is not depreciated.)

So with the entire house rented out now, the structure value of $140,000 is what will be depreciated over the next 27.5 years.