Have a rental house that I rented out for 23 yrs and depreciated it, then lived in it, and am now renting it again. How do I enter it to get the remaining depreciation?

[homesteadventure]

Do I have to start all over and depreciate for 27.5 years again

[AmeliesUncle]

From the way I read the Regulations, yes, you need to start over.  Use the current "Adjusted Basis" and restart the 27.5 years.

[DaveF1006]

No, you will not be able to depreciate it again for the full 27.5 years. You would resume depreciating again over the next 4.5 years. Here is how you will report it.

1. Select federal tab in the left pane and go to income and expenses>Rentals, Royalties, and Farm>show more
2. Rental Properties and Royalties (Sch E) start or edit
3. After you enter a description of your property enter the income and expenses.  When you are done, then you will select the add expenses and asset button.
4. You will select asset and rental property as the asset plus all other applicable expenses.  
5. After the expenses are added, Turbo Tax will ask for depreciation of your property and ask if the [property can be depreciation. here you will say yes.
6. Then you will continue with next few questions until you reach a screen that asks for a description. Here indicate rental real estate. Next screen indicate that it is rental real estate.
7. Next screen is where you will record a description and original cost basis and when you bought the home.
8. Next screen asks for a little more information.  Here you will say no, I have not always used this item 100% of the time for this business.
9. Next asks Have you used this item 100% for this business since you acquired it? You will say no. You will select and answer these questions

10. First used this item at least part of the time for this business, and also used it for personal purposes.

    Date I started using it in this business:

    Percentage of time I used this item for this business in 2020 (e.g., 80%): 

11. The next screen will confirm your prior depreciation. There you should see the prior depreciation that should have been taken in the 23 years you rented your house.  I have included a screenshot that illustrates 23 years of depreciation based off of the original cost basis of $200,000. Note, if you made improvements during this time and wish to depreciate those, these will need to be added as additional depreciable assets.  Here is the screen shot that illustrates prior depreciation made. 

    Edited 01-27-2021|07:13PST]

     

[AmeliesUncle]

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@DaveF1006 wrote:

No, you will not be able to depreciate it again for the full 27.5 years. You would resume depreciating again over the next 4.5 years.  

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I disagree.  Regulation §1.168(i)-4(c) says that a conversion to personal use is considered as a "disposition" for depreciation purposes (but no gain or loss is to be calculated).

That means when the property is later "placed in service", it is treated as a new property.  So you use the current Adjusted Basis and depreciate it over 27.5 years.

[Opus 17]

Assuming this to be true, then the depreciation cost basis that the tax payer starts with now is the depreciated cost basis they were at when they converted the home back to personal use, And not the original purchase price or the current fair market value.

[homesteadventure]

Do I continue  for the next 4 years at the original amount?  or do I have to start another 27.5 years?

[Opus 17]

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@homesteadventure wrote:

Do I continue  for the next 4 years at the original amount?  or do I have to start another 27.5 years?

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Without more research, I don't have that answer at my fingertips.  I was just pointing out that if you do have to start the clock over at 27 years, you use the current cost basis, which is already significantly depreciated.  

I don't have any reason to doubt the employee expert but I also know that @AmeliesUncle is generally accurate and reliable.  Perhaps I can recruit a tiebreaker who knows more about rentals.

@Carl @Hal_Al @DoninGA 

[Hal_Al]

I don't have an opinion but agree with @Opus 17 , @AmeliesUncle is very accurate, reliable, clear and concise.  The fact that he has referenced the source and states that he has read the regulation,  makes me confident he's right. 

At first,  it seems too good to be true and open to abuse.  But note that it's the adjusted basis (including reduction for the  depreciation already taken, I assume) that you depreciate .  When the taxpayer sells he'll have that much more depreciation to recapture (unless he out foxes the IRS by dying first). 

[AmeliesUncle]

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@Hal_Al wrote:

At first,  it seems too good to be true and open to abuse ...  When the taxpayer sells he'll have that much more depreciation to recapture . 

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It's just the opposite.  Because you need to restart the 27.5 years using the very-low Adjusted Basis, you will be claiming LESS depreciation each year.

[Opus 17]

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@AmeliesUncle wrote:

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@Hal_Al wrote:

At first,  it seems too good to be true and open to abuse ...  When the taxpayer sells he'll have that much more depreciation to recapture . 

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It's just the opposite.  Because you need to restart the 27.5 years using the very-low Adjusted Basis, you will be claiming LESS depreciation each year.

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I think it's one of those things that can cut either way.  Depreciation is often where the real profit is with rentals. @Carl  has had a lot to say on this in the past.  Depending on the circumstances, claiming less depreciation per year for more years may be more of an advantage than claiming a higher amount for the last 4 years and then losing it.  I'm certainly not qualified to say which is better in a given scenario, and I'm sure I don't understand all the nuances. 

[AmeliesUncle]

Yeah, you are right that claiming less depreciation each year isn't necessarily always a bad thing. 

I guess I was more referring to the comment about "he'll have that much more depreciation to recapture", which is just the opposite.

[Carl]

Basically, here's how it works, and it's rather simple once you know. It's that "knowing" that's not intuitive.

First, keep in mind that only the structure is depreciated, and not the land. So the math is a bit tricky in the TTX program to get the figures right.

Say you've got a property with a cost basis of $100,000 that you put in service in 1990 and removed from service in 2013. That's 23 years of depreciation taken. In the TurboTax program up to the 2013 tax year, you had the COST as $100,000 and COST OF LAND at $25,000. The program "did the math" for you, in the background and figured the structure value at $75,000. That $75,000 is the amount that was depreciated over 27.5 years.

In 2013 you took the property out of service with 23 years of depreciation taken thus far.  Up to that point your total depreciation taken was roughly $62,700.

Now, in 2020 you placed the property back in service. You do not continue depreciation from where you left off. You have to start over from square one and depreciate for the next 27.5 years. However, you have to account for that 23 years of depreciation already taken ($62,700). You do that on the 2020 tax return by reducing the cost basis of the structure only, by $62,700. The cost of the land will *NOT* change.

To do that, subtract $62,700 from your original cost basis of $100,000 and that gives you $37,300. So in turbotax 2020 you'll enter $37,300 in the cost box. Since the value of your land is not depreciated, it will not change. So enter $25,000 in the COST OF LAND box.

Now, the program does the math based on the adjusted cost basis of $37,300 and figures the structure value/cost at $12,300.  So now, $12,300 will be depreciated over the next 27.5 years starting on the date you placed it back in service in 2020.

In 2020 you placed the property back in service.

[tagteam]

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@AmeliesUncle wrote:

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@DaveF1006 wrote:

No, you will not be able to depreciate it again for the full 27.5 years. You would resume depreciating again over the next 4.5 years.  

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I disagree.  Regulation §1.168(i)-4(c) says that a conversion to personal use is considered as a "disposition" for depreciation purposes (but no gain or loss is to be calculated).

That means when the property is later "placed in service", it is treated as a new property.  So you use the current Adjusted Basis and depreciate it over 27.5 years.

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@AmeliesUncle is correct and this issue has been raised numerous times in the past on the TurboTax (and Intuit Accountants) boards.

The basis for depreciation when real estate has been used as a rental, converted to personal use, and then converted back to rental use is the lesser of fair market value at the time of the last conversion or the adjusted basis. Obviously, the adjusted basis is most likely to be lower due to the accumulated depreciation deductions taken in prior years.