Partial Year Depreciation for Principal Residence Leased Condo

[barrons185a]

I listed my principal residence condo for rent on April 29, 2021 and left it unoccupied until it leased for 5 months from Jun-Oct 2021. In November, I reoccupied the condo as my principal  residence and intend to do a partial year lease again this year. 

On the asset entry worksheet, I entered 4/29/2021 as the date placed in service and also entered 51% as the percentage of business use on line 6 (153 days leased + 33 days unoccupied divided by 365).

So, the depreciation amount is correctly calculated - 1yr / 27.5yrs x .7083 MM convention placed in service 4th month =  .02576 of business use basis amount. I assume this represents depreciation from April MM to the end of the year. Since I reoccupied the condo in November, does the depreciation need to be adjusted or is that already accounted for in the 51% business use factor? 

[Carl]

For starters, your math is wrong for figuring depreciation. That's not how depreciation is figured for residential rental real estate per IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf.  Remember, when it comes to taxes, if it looks easy then you're doing it wrong. 🙂

Use the worksheet begining on page 38 and continued on page 39 of the above referenced document. For residental rental real estate (including renting part of your primary residence) use Table A-6 on page 73.

Now, when you take a property out of service, that stops depreciation. But you already know that. Here's where you need clarification.

When you place the property back in service, you must first reduce the cost basis of the *DEPRECIATED ASSETS ONLY* by the amount of depreciation you have already taken. Then using that new reduced cost basis the depreciation starts over from day one for the next 27.5 years. Keep in mind that since land is never depreciated, you will reduce the cost basis of the "STRUCTURE ONLY". The cost basis of the land will not change.

[barrons185a]

No wonder they call you the Champ! 

I went back and verified Table A-6 and it confirms the 2.567% factor directly - no need to calculate it. I imputed the factor from what Turbotax showed as the depreciation amount compared to the basis and this just further confirms TurboTax is correct.

And so I think basically you are saying that this year when I calculate 2022 depreciation, it will consider what looked to me like excess depreciation in 2021 by reducing my basis - basically self correcting as we go. If I’m misunderstanding, please let me know because this also looks too easy!😀

Can you also please comment on the 51% business use input on line 6, where I added the 33 days the condo was vacant to the 153 days it was leased? I did not use this for allocating expenses between personal / rental on Schedule E, but Pub 527 says that ordinary and necessary expenses including depreciation can be deducted when the property is vacant and I assume this is the way to reflect that for depreciation.

I don’t see a way to do this for interest, taxes, and HOA costs.

Thanks again for you prompt spent-on comment!

[barrons185a]

Change last line ... Thanks again for your prompt spot-on comments!

[Carl]

Can you also please comment on the 51% business use input on line 6, where I added the 33 days the condo was vacant to the 153 days it was leased?

For starters, it's not 51% business use. It's ONE HUNDRED PERCENT business use. What you enter is the percentage of business use *after* you converted it to a rental.

The days must add up to the days in service. So you have 120 days rented and 33 days vacant with no personal use. That adds up to 153. Days vacant will make no difference to depreciation or anything else really. What does make a difference is if you had any personal use days *after* it was converted to a rental. What you used the property for before it was a rental is irrelevant and just doesn't count for anything.

You also enter the total of all expenses incurred *after* it was converted to a rental, because those expenses are 100% deductible on the SCH E.  You don't pro-rate anything. (one possible exception below).

Enter the total mortgage interest paid. The program itself will prorate between SCH E and SCH A based on the in service date.

Enter the total property taxes paid and the program will prorate between SCH E and SCH A for you.

Now with the property insurance, that "may" have to be prorated manually by you, but not sure. You can check it both ways. Property insurance is a SCH E deduction for the period of time it was a rental. Property insurance is *not* deductible at all for the period of time it was not a rental. I reinterate; property insurance is *NOT* a SCH A itemized deduction. You flat out can not deduct property insurance on "personal use" property. Period.

Finally, take note that if the total of all of your SCH A itemized deductions do not exceed your standard deduction, then not only will the SCH A deductions not help, but a SCH A will not even be generated. You'll just take the standard deduction. ($12,550 filing MFS or single, and $25,100 if filing joint). So pro-rating and itemizing everything manually may be a waste of time of your part.

[barrons185a]

Thanks, Champ.

As you noted - "What does make a difference is if you had any personal use days *after* it was converted to a rental."

As shown below, I did re-occupy the unit for 60 days so on Schedule E I used 179 personal days and 153 of leased days and Turbotax used this to allocate costs. For Depreciation, TT by default did not ask for vacant days so it populated the business use % at 46% vs 51% that would be calculated using the vacant days. This appears to make a difference since the percentage gets applied to the basis to calculate the depreciation amount.

[DianeW777]

The vacant days, if the unit was available for rent and held out as available for rent during that time, but not yet rented, would be added to the days of rental use. If not, then they are considered personal use days and will not count towards the business use percentage.  You must clarify what you mean by 'unoccupied' and 'vacant'.

[barrons185a]

Thanks for the input, Dianne. It seems to me this is the correct way to handle the vacant days, at lease for depreciation. I physically left the unit and moved to a different city for 6 months and the condo was listed on MLS for rent  for the one month before it actually rented. Logically, it seems like the vacant days would be added to the rented day in order to apportion the interest and property taxes to the Schedule E costs, but having read IRS guidance they clearly make the point that it should only include the days rented at FMV. So, think I'll use the vacant time to prorate the depreciation expense on Form 4562 only and not Schedule E. Thanks again!

[Carl]

think I'll use the vacant time to prorate the depreciation expense on Form 4562 only and not Schedule E. Thanks again!

I don't know why the IRS even cares about vacant days, as they don't change anything what-so-ever for business use, depreciation, or anything else for that matter. I can only surmise the IRS wants a confirmation of vacant days in order to differentiate it from personal use days.

[barrons185a]

Thanks again, Champ.

According to Pub 527, "Vacant rental property. If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you can’t deduct any loss of rental income for the period the property is vacant.”

In my case, the property (my personal residence) was vacant starting April 30 until it rented for 5 months starting in June, and then I reoccupied it in November. So, the property is therefore "placed in-service" and depreciation begins in April instead of when the lease commences and ends in October. Additionally, expenses such as insurance, taxes, utilities, and HOA costs for April are deductible.

I had a lot of trouble trying to understand how to input this into TT, because it prorates costs based on the rental and personal days entered - vacant days are not an input. However, after reading the TT help, I discovered the following statements:

In the year you convert your property from personal use to a rental, the days you lived in the home as you primary residence prior to conversion  do NOT count as personal use days.

In the year you convert your property from rental to personal use, the days you lived in the home as you primary residence after the conversion do NOT count as personal use days.

So in my case, I entered the 5 months as 153 days rented and zero days of personal use. Then I input costs for the lease and vacant term ( excluding all costs during the time I occupied the condo ), and TT allocated 100% of it to Schedule E.

Additionally, for depreciation TT assigned 100% as the “Percentage of Business Use” on line 6 of the Asset entry form. I kept thinking this was wrong since the asset was only in service for 6 months as business plus 6 months of personal use. But, upon further reflection this is correct. The full cost basis of the asset should be depreciated not 50% based on the business use, since TT is going to calculate depreciation for only 6 months. In my case, I input the condo was placed in service in April and then converted back to personal use in Nov. Using a cost basis of 50% is definitely not correct - if I had only rented the condo for 1 month TT would only have calculated 1 month of depreciation on 12.5% of the cost basis. 

Another point to note, for anyone else reading - I wanted to expense some Sec 179 furnishings purchased in 2021 that individually cost less than the required $2500. But, as noted in the TT help screen “A Sec 179 deduction is subject to recapture if you converted the asset to personal use before the end of its depreciable life.” So I was not able to deduct these items since I moved back into the condo in November, well before the depreciable life end.

Once again, thanks for you help and comments.

[barrons185a]

Just wanted to correct the statement:

"Additionally, for depreciation TT assigned 100% as the “Percentage of Business Use” on line 6 of the Asset entry form."

TT did not assign this. It was actually an input required under "Tell us more about this rental Asset - Percentage of time I used this item for this business in 2021"

I think TT should consider clarifying the input to note it is requesting the percent of time the asset was used in the business during the time the asset was in-service. Otherwise, it would result in disproportionate depreciation allocations as noted above.

If TT reviews these comments, a response would be greatly appreciated and would help with the correct filing of returns.

[Carl]

I think TT should consider clarifying the input to note it is requesting the percent of time the asset was used in the business during the time the asset was in-service. Otherwise, it would result in disproportionate depreciation allocations as noted above.

What screen are you referring to?The only one I can find is below. Note what I've circled in red.

[barrons185a]

This is the one ...

[Carl]

Actually, we're on the same screen. The difference is, you're using the online version and I'm using the desktop version. While the "note" clarifies it in the desktop version, that note is not present in the online version.

@MayraM assuming we are "in fact" looking at the same screen but in different versions, can you pass this on to the online programmers please?

[tagteam]

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@Carl wrote:

Actually, we're on the same screen.....

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@Carl You are not on the same screen. The screen below is the equivalent screen from Home & Business and the screens are similar between the desktop and online versions.

The screenshot you posted is from the Property Profile section while the screen @barrons185a posted is from the Assets/Depreciation section.