Converting a rental property back to primary residence. What to do with expenses.

[Anonymous]

My daughter bought a house in 2013.  She lived in it for a few years, married a soldier, they got transferred so she converted it to a rental property in 2017.  Now she is moving back and gave the renters notice their lease wouldn't be renewed and they move out the end of August.  At what point do you determine repairs etc a rental property expense versus a "you are moving back and want to fix some things"?  Like painting the interior?  Fixing the fence, which wasn't damaged by renters but is so rickety over the 5 years work needs to be done to it.  I'm just not sure how to determine this.  Thanks everybody!

[tagteam]

If the repairs are done during the period the property is being used as a rental, then such repairs are deductible as rental expenses.

After the conversion to personal use (e.g., as a primary residence), repairs are not deductible (although any improvements made can be added to the basis of the property).

[Anonymous]

Two more questions:  So the date the property reverts back to a primary residence is determined by the owner and not necessarily when the tenant moves out? Also wouldn't it be more advantageous to add them to the basis of the property?  Thanks, Diane

[tagteam · Accepted solution]

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@Anonymous wrote:

So the date the property reverts back to a primary residence is determined by the owner and not necessarily when the tenant moves out? 

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That is correct. If you move in to the property and/or do not make the property available for rent, then the property would be considered not available for rent. In either of those instances, you could not deduct typical rental expenses (e.g., repairs, utilities, et al).

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@Anonymous wrote:

Also wouldn't it be more advantageous to add them to the basis of the property? 

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If the property is not available for rent, you cannot add repairs to the basis of the property; only improvements can be added to the basis once converted to personal use.

[Anonymous]

Thank you tagteam!!!  Diane in Texas

[kwt89]

Follow-up question from the above scenario:

Let's say that after the tenant leaves end of the August, the owner requires to do a few repairs/maintenance work before the owner moves back in, all due to natural wear-and-tear from the tenant living there (examples: replace the carpet, replace light fixtures, replace the microwave, fix the door-bell, repave the driveway).   Would it be possible to expense these as part of the rental before converting back to primary residence, or would this raised any yellow flags because the repair work is all "done at the end of rental property-to-primary residence conversion?  (Let's say the repairs/maintenance had to be made to get the property back to the original condition at start of renting)

[Critter-3]

Once the renter moves out and the place is no longer up for being rented then the rental time frame to put things on the Sch E has closed.  Once the  tenant  leaves and you no longer are looking for a new tenant then that is the date the rental converted to personal use even if you don't move right in.  Any repair expenses after that date is non deductible personal expenses.  Any improvements can be added to the home's basis but no new depreciation is produced.  https://www.landlordstudio.com/blog/capital-improvements-vs-repairs/#:~:text=A%20capital%20improveme....

[tagteam]

I agree with @Critter-3. 

If the property were available for rent when the repairs were done, then the repairs would be deductible.

If the property were not available for rent, because the property had been converted to personal use immediately after the tenant vacated, then the repairs are not deductible.

[Carl]

Typically, the property converts to personal use the day after the last tenant moves out. This is because you have specifically made the decision already, to not rent it out again as supported by you notifying the tenant of the non-renewal of their lease, as well as not actively attempting to rent it out upon termination of the current lease.

Any repairs done after the last tenant vacates the property are for personal benefit, and not for the benefit of the next paying tenant. Therefore those repairs are not deductible. So do as many repairs as you can before the current tenant moves out and ensure the date of the invoice/receipt is dated before the property is vacated by the tenant.

Now property improvements are an entirely different thing. Property improvements either retain or increase the value of the property. For example, a new roof is a property improvement. New windows are a property improvement. But replacing that broken deadbolt on the front door is a repair and not an improvement since it does not retain or add value to the property.

Now any property improvements done after the last tenant moves out will add to the cost basis of the property. But you will not enter those improvements done after the last tenant moved out, anywhere on your tax return. That's because the improvement will not be placed "in service" for the purpose of producing income. You simply file the paperwork for said improvements with other papers related to the acquisition of the home and they won't come into play on a tax return until one of three things happens in the future.

1) You convert the property back to a rental

2) You sell the property

3) You die.

The basic difference between a repair and a property improvement:

Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.

Repair expenses are those expenses incurred to return the property or it's assets to the same usable condition they were in, prior to the event that caused the property or asset to be unusable.

[tagteam]

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@Carl wrote:

Any repairs done after the last tenant vacates the property are for personal benefit, and not for the benefit of the next paying tenant. 

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That statement is accurate, as @Critter-3 indicated, only if the owner is no longer looking for a new tenant.

[Schagane1]

Please advise, are there any tax consequences with converting property back to personal use? 
Do I just dispose an asset for personal use and because this not a sale there is  no depreciation recapture or passive loss deduction until I sell the house, right?

I am planning renting the house again next year. 
Do I start the depression over? Or should I continue depreciation and put prior year depreciation amount? 

[Carl]

When converting a property from personal use back to a rental when it was a rental in the past, you have to adjust the cost basis of the property (structure only) to take into account the depreciation that was taken before.

You reduce the cost basis of the property by the total amount of depreciation taken in the prior years when it was a rental before. Then, depreciation starts over from year 1 for the next 27.5 years using the new, adjusted cost basis.

You will also need to keep a separate record of the prior depreciation taken, as it will come into play in the future when you sell the property.