depreciation on property out of service and then placing it back in service

[firedrake123]

We placed a property for short term rental use and have been depreciating it. We have a situation, where we can no longer run it as business but place it as long term rental

For the duration of Business :

Depreciate the property as we use. It was placed in service with costs basis of say 10000$

Close it out as a personal use property (how?). 

Total depreciation  so far assume (10000$)

For long term rental (schedule E):

How do I depreciate the property now?

Basically do we restart the cost basis (10000$). Or the new cost basis will be Original cost basis minus te depreciated amount i.e. (90000$). Or something else?

I do have to do this anyways, for 2021 as it will continue as long term rental

[MaryK4]

You can continue using the same depreciation schedule since the property did not change- just because the nature of the rental changed, the income and expenses will be different but you can continue reporting.

[firedrake123]

If i can use the same schedule, how do i tell turbotax to follow it. Because when i Use schedule E for reporting it shows me Residential property depreciation. Which changes the depreciation schedule.

[ColeenD3]

If you have fully depreciated the property, it has a basis of zero. You can't give it a new basis amount because you change the business format.

[firedrake123]

Sure if fully depreciated. But if not fully depreciated, then i should adjust the costs basis right. I am thinking that for schedule E, i use Residential Property as TurboxTax gives that as the only option. And then enter cost basis as the one which is 100000$ - 10000$(since 10000 is already depreciated)?

[DianeW777 · Accepted solution]

The cost basis as indicated by @ColeenD3 would be zero if you have already fully depreciated the property under another business or rental use.

If the cost basis has not been fully depreciated, as you indicate in your recent question, but you have been using the property on your tax return as residential rental property since it was placed in service (not always the purchase date) then you should continue with the depreciation as usual.  If it was always a rental then it was always 25.7y recovery period (number of years for depreciation period), using Residential Rental Property.

Keep in mind that land value must be entered so that no depreciation is being used for land because it is an appreciable (vs depreciable) asset.

If for some reason, you had this property listed as something other than residential rental property (nonresidential real property) in the past, then I suggest you indicate that property was disposed of with a date it was disposed of (the date you converted it to a residential rental building).  No sale just disposition.

Then add the property back to your return under rental activity property.  Adjust the cost basis for the depreciation already used for the different type and recovery period on prior returns. Keep track of your depreciation already used for future sale (keep a copy in your current tax files until you sell this property).

Please update with more details if you have more questions.

[shahbazi784]

Hi Diane,

I have a residential rental property that I placed in service in 06/2020, then we started a gut rehab on it in 02/2021 and it was out-of-service completely from then until 12/2021. As you describe, can I just list two depreciation assets on my taxes: one placed in service 06/2020 and disposed of in 02/2021, and then under the same property, a second depreciation asset that represents the same building, just with a placed in service date of 12/2021? 

Additionally, I realized that I did not calculate the cost basis correctly for my 2020 taxes (over-estimated the land basis, as per the assessed land value by the county). Can I change my cost basis to the now-higher amount or is that not the correct way to do this? If so, what do I list for accumulated depreciation? The amount of depreciation I claimed in 2020 ($4298)? Or the higher amount I should have been entitled to in 2020 ($7207)?

[DaveF1006]

Yes, in order to get the correct amount of depreciation for the property, you will list this as two depreciable asset entries, each with it's own separate dates of service.

For the mistake in depreciation, I would amend my 2020 tax return to reflect the difference in the land and building cost basis to get a refund for the difference in depreciation. As far as adjusting the depreciation, if the correct basis was reported in your 2021 return, the accumulated depreciation amount should be correct in your return but check your depreciation reports to see if this is correct. Your 2020 depreciation report should be correct after you amend your return.

To amend your 2020 return.

1. Sign in to TurboTax.
2. Scroll down to under Your tax returns & documents,
3. Select Amend (change) 2020 return,
4. Then Start amending my 2020 return.
5. Then, select the reason you’re amending and follow the onscreen instructions.

@shahbazi784

[shahbazi784]

Hi Dave,

Thanks for your help. I didn't file my 2020 taxes with TurboTax so I guess I cannot file the amendment with TurboTax? I filed with Credit Karma taxes which is now Cash App taxes, and doesnt seem like they can amend it for me. Do you recommend doing it manually given the complexity of having a Schedule E?

Shayan

[AmyC]

Maybe. I searched for Cash App taxes and see that amendments are listed. You should contact them to see about the 2020 amendment. Doing a depreciation schedule yourself is possible but would require more time and work to get it right. The schedule E wouldn't be bad, and honestly, changing just the land value wouldn't be awful. Here is the depreciation help you would need. If you can read the IRS pug and understand the depreciation, great. Otherwise, call Cash App or a professional.

@shahbazi784

[shahbazi784]

Thanks, Amy. I tried on their website to file an amendment and it looks like they only allow amending a 2021 return because it goes straight to that with no option to pick a different year. I think I will just do it manually because I think I understand depreciation reasonably well and the 1040-X form only seems to require updating the bottomline figures, which I can calculate for myself (the only thing that changes is the rental losses from Schedule E). So I will just have to include an amended Schedule E with corresponding sub-forms with my 1040-X and I should be good to send that in, correct?

Does it matter that I am submitting the 2021 taxes digitally with the new value for land value while the 2020 amendment will be in processing? They won't know I have amended my 2020 return by the time they receive my 2021 return...

Shayan

[Carl]

@firedrake123 so far, none of the responses you've received are correct, in that I don't think the responders are interpreting your initial post as I do. I see two possible scenarios.

1) You were depreciating the property as a SCH C asset over 39 years, or

2) Regardless of how it was classified before, you converted the property to personal use for a period of time, and are now going to use it as residential rental real estate on SCH E.

So which is it? In what tax year and on what date specifically, did you convert the property to personal use?