Depreciation of rental property that was rented on separate occasion

[husky96821]

If I rented my property from 1/1/2016 - 12/31/2017, lived in it for a year (1/1/2018 - 12/31/2018), and then rented it out again beginning 1/1/2019, how do I depreciate the rental the second time around? Do I use a 27.5 year period or 25.5? Do I need to get another appraisal to value the property as of 1/1/2019 to determine lower of basis or FMV? How would I determine the basis the second time around (would it be the adjusted basis of the property at the end of the first time I rented the property)?

[KarenM90]

Yes, since this is the same piece of rental property you need to continue with the adjusted basis of the property at the end of the previous rental and depreciate it for 27.5 years.

You will not be counting the depreciation for the years(s) it was not available for rent, ie, while you were living in it.

KarenM90 (edited 2.21.20 11.25 am pst)

[husky96821]

So I would continue depreciating it for the remaining 25.5 years beginning 1/1/2019?

[Carl]

If I rented my property from 1/1/2016 - 12/31/2017, lived in it for a year (1/1/2018 - 12/31/2018), and then rented it out again beginning 1/1/2019, how do I depreciate the rental the second time around? Do I use a 27.5 year period or 25.5?

You'll pick up right where you left off. However, it takes a little "trickery" to get the program to get the right numbers. You can't just do a custom entry with 25.5 years of depreciation, because the numbers just won't be right. So here's how you have to do this. One thing that makes this really simple for you is the fact that you have depreciation on the property for "exactly" 2 solid years of 100% business use. Here we go.

Work through the property profile as shown below, heeding the guidance I've added in red.

Then press on to the screen asking for your passive losses.

Get your passive losses not allowed in the past, from the IRS Form 8582 on the 2017 tax return. It's in the section titled "Worksheet 5". Make sure you enter this number as a negative number. If no carry over losses are shown, (which I seriously doubt) then just enter a zero.

Continue on through the program, entering your rental income received in 2019, and rental expenses paid/incurred in 2019. Next, you work through the Assets/Depreciation section and indicate that you "do" have assets to depreciate.

On the screen "Tell us about this asset" you'll need the IRS Form 4562 from your 2017 tax return. There's two of them that print in landscape format for this property. You want the one titled "Depreciation & Amortization Report".

- In the program enter the description exactly as it appears for the property on your 2017 form 4562.

- On the 4562 add together the amounts in the "cost" and "cost(net of land)" columns. Enter the total in the "COST" box in the turbotax 2019 program.

In the "COST OF LAND" box, enter the amount on the 4562 in the "land" column.

For the date purchased or acquired, enter the date you closed on the purhcase of the property when you "originally" purchased it. More than likely that date will be years ago. That's expected.

Now click Continue.

On the "Tell us more about this rental asset" screen, select that it was purchased new, and used 100% for business.

Now here's the trickery. In the "date first started using in this business" enter 1/1/2017, then continue.

You're now on the "confirm your prior depreciation" screen.

Now look at the IRS Form 4562 from your 2017 tax return. Add together the amounts (for that specific asset only) in the prior year depr column and the current year depr column. The total you get "should" be within a few bucks of what you see displayed on your screen in the box asking you to confirm your prior year's depreciation already taken. If it's only off by a few bucks, you can change it to match exactly if you want. Then click Continue.

Now you're on the Asset Summary screen. Since technically 2019 is your third year of renting this property, the deprecation amount shown for 2019 should be no more than $1 different from the "current year depr" shown on your 2017 form 4562 in the "current year depr" column.

This "sets you up" to continue depreciating right where you left off, with your 2019 return taking your 3rd year of 27.5 years of depreciation on the property asset.

[AmeliesUncle]

I disagree with the others.  You need to restart the depreciation over 27.5 years, using the lower of the current Adjusted Basis and the  Fair Market Value.

Regulation §1.168(i)-4(c) says that conversion to personal use is treated as a disposition (but not gain or loss is calculated).  That means when you convert it back to rental use, it is treated like a new property.