Temporary removal of rental property from the market, tax implications and records.

[jmoe7]

I currently have a rental property that I am considering taking off of the market in August, then putting it back on the rental market next August.  It is likely that I will use the house as I make repairs and upgrades, prior to putting it back on the market.  However, it's also likely that I might decide to put it back on the market as a vacation rental rather than a permanent rental, so that I can use it part of the time.  I have tried to find information concerning the tax implications and how depreciation will be calculated should I return it to the market, both as a permanent rental or a vacation rental.  Can anyone comment or point me to literature to address this scenario?  Thanks for any help that you can provide. 

[ColeenD3]

There is no literature that addresses your scenario. You have to take various bits of information and extrapolate how it will work. Up until now, it has been straightforward. Keep track of your accumulated depreciation for the future.

Your improvements will be a new asset to be depreciated. Since it is not placed in service during the time of renovation, you can't take any rental expenses.

Vacation home rules follow.

Topic 415 - Renting Residential and Vacation Property

If you receive rental income for the use of a dwelling unit, such as a house or an apartment, you may deduct certain expenses. These expenses, which may include mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance, and depreciation, will reduce the amount of rental income that's subject to tax. You'll generally report such income and expenses on Form 1040 (PDF), U.S. Individual Income Tax Return, and on Form 1040, Schedule E (PDF), Supplemental Income and Loss. If you're renting to make a profit and don't use the dwelling unit as a residence, then your deductible rental expenses may be more than your gross rental income. Your rental losses, however, generally will be limited by the "at-risk" rules and/or the passive activity loss rules. For information on these limits, refer to Publication 925, Passive Activities and At-Risk Rules.

If you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct. You're considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of:

1. 14 days, or
2. 10% of the total days you rent it to others at a fair rental price.

It's possible that you'll use more than one dwelling unit as a residence during the year. For example, if you live in your main home for 11 months, your home is a dwelling unit used as a residence. If you live in your vacation home for the other 30 days of the year, your vacation home is also a dwelling unit used as a residence unless you rent your vacation home to others at a fair rental value for 300 or more days during the year.

A day of personal use of a dwelling unit is any day that it's used by:

• You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main home and the other owner pays a fair rental price under a shared equity financing agreement
• A member of your family or of a family of any other person who has an interest in it, unless the family member uses it as his or her main home and pays a fair rental price
• Anyone under an agreement that lets you use some other dwelling unit
• Anyone at less than fair rental price

If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You won't be able to deduct your rental expense in excess of the gross rental income limitation (your gross rental income less the rental portion of mortgage interest, real estate taxes, and casualty losses, and rental expenses like realtors' fees and advertising costs). However, you may be able to carry forward some of these rental expenses to the next year, subject to the gross rental income limitation for that year. If you itemize your deductions on Form 1040, Schedule A (PDF), Itemized Deductions, you may still be able to deduct your personal portion of mortgage interest, property taxes, and casualty losses on that schedule.

There's a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don't report any of the rental income and don't deduct any expenses as rental expenses.

[Carl]

I currently have a rental property that I am considering taking off of the market in August, then putting it back on the rental market next August. It is likely that I will use the house as I make repairs and upgrades, prior to putting it back on the market.

While you can do that, there is really no requirement to convert the property to personal use, if your only reason for taking it off the market is so you can perform upgrades and repairs.

It is likely that I will use the house as I make repairs and upgrades, prior to putting it back on the market.

Use it for what? As your primary residence, 2nd home or vacation home? If any of those three then yes, you'll want to convert the property to personal use at least one day after the last renter moves out. Your deductible expenses will be extremely limited after you convert it to personal use.

If this is a case of where the house is quite a distance away from your primary residence and you will be living in the property while repairs and upgrades are in process, for the sole purpose of saving travel time/expenses while performing those upgrades, then that's not personal use and you don't have to convert the property to personal use. Provided of course, you still retain your primary residence "as" your primary residence during this time.

However, it's also likely that I might decide to put it back on the market as a vacation rental rather than a permanent rental, so that I can use it part of the time.

To keep that option open and to make "the paperwork" easier at tax time, converting it to personal use as above would give you easier flexibility then, for converting it back to a SCH E rental property, or (if it will qualify) as a SCH C short term rental.

So things to keep in mind if you convert the property to personal use.

1) All expenses incurred during this time are flat out *NOT* deductible. Only mortgage interest and property taxes can be claimed, and only as a SCH A itemized deduction for the period of time the property is classified as personal use. That's int.

2) Repair, maintenance, utilities, and other expenses are flat out not deductible at all, even while the property is personal use. Just as they are not deductible on your primary residence.

3) Any property improvements you pay for will be entered in the assets section in the tax year you return the property to business use, be it a SCH C business or a SCH E business, and depreciated over time.

4) When you convert the property back to business use, you must subtract from your cost basis all prior year's depreciation taken on the SCH E in the past, and that will be your new cost basis for depreciation. Depreciation will start over from year 1 in the tax year you place the property in service. (27.5 years for SCH E property, and 39 years for SCH C property.)

I have tried to find information concerning the tax implications and how depreciation will be calculated should I return it to the market

Have I covered it sufficiently above, to answer this query?

[jmoe7]

Thank you both for the information.  I will need to review what you have provided me and may have additional questions but your responses are greatly appreciated.