Stop. I can tell you right now that almost all of the information you have been provided thus far, is just flat out wrong. If you follow the advice then chances are "extremely" high that your 2019 and/or 2019 tax return will be audited. Audits of questionable tax returns generally occur 24-36 months after they are filed and accepted by the IRS. So lets get this done correctly to avert an audit on your 2018 *and* 2019 tax return.
We bought a rental in August of 2018 and collected two months rent (Sept and Oct 2018). We reported this on our 2018 taxes.
I assume you reported this on SCH E in your 2018 tax return.
We demolished the rental house in January of 2019
Which tells me that when the last renter moved out at the end of October 2018, you made no attempt to rent the property out again. So there's several things that apply here for your specific and explicit situation.
First, if the property is rented for less than a year, and the period that is is rented does not cross calendar years, then you are not required to depreciate "anything". Since you obviously fall into this situation, I suggest you amend the 2018 tax return to remove depreciation. If you don't, then you will have to track this for so long as you own the property - even after rebuilding on it. Not worth it for a mere 2 months of depreciation. I'll get into the exact procedures you need to follow later. Right now, I'm just educating you.
we did not convert the property to personal use yet.
Bad move. Very bad. So if you file SCH E with your 2019 taxes showing no income yet claiming depreciation and expenses for a structure that did not exist after Jan 2019, you're basically hanging out a sign that reads, "HEY! IRS! AUDIT ME NOW! PLEASE! HURRY! QUICK! I WANT TO PAY LOTS OF FINES AND PENALTIES!"
Since you made no attempt to rent the property after the last renter moved out in Oct 2018, the property gets comverted to personal use effective one day "after" that renter moved out, since no attempt to made to rent it out again. So you need to amend your 2018 tax return first to do two things.
- Covert the property to personal use effective the day after the last renter moved out.
- Cancel out the 2 months of depreciation that you took.
So in TTX 2018 you'll amend it by indicated that you did convert the property to personal use with a conversion date one day after the last renter moved out.
Then in the assets/depreciation section I expect the only thing to be listed there is the property itself. Elect to EDIT that property to work it through. Select YES where it asks if you stopped using the asset in 2018. Your stop date is one day after the last renter moved out. Then on the "Special Handling Required?" screen, you *must* select YES. (If you select NO then you are *FORCED* to enter sales information, and you did not sell the property.)
On the screen where it asks for COST and COST OF LAND, enter the digit ZERO for both boxes. By doing this, no depreciation will be taken and this is how you do it when you are not required to take depreciation. (Depreciation can hurt you in the future when you sell the property. So that's why it's not worth it for two measly months.)
When done, finish working through the amend process and then print the return. Take special note that you can not e-file an amended return. The IRS says so. You have to print, sign and mail it to the IRS yourself.
Also, if your state taxes personal income you'll be amending your state return also. That state return has to be printed, signed and mailed too. But the state amended return is mailed to a different address than your amended federal return.
When you print the amended returns, detailed mailing instructions will be printed separately for the federal amended return and the state amended return.
On your 2019 tax return, you will NOT be filing a SCH E at all. Life is simple. However, I do have more information to provide you. But waiting for your response to this post before I provide it. My additional information won't affect either your 2018 or 2019 tax return. It's more informative and educational in nature to help you with future tax planning.
