Rental-property and how depreciation affect in a future sell

[Tony21]

We lived in our house from January 1st, 2019 to September 5th, 2019. We rented our house house on September 6th, 2019 (that is when the contract started and the tenants moved in). I was doing the rental/royalty income section and start reading about depreciation. I have no idea what is depreciation? If this is something good or bad? If this is going to affect me when I sell the house in the future.

Here are some of my questions:

1) For what I read, I am not force to deduct the depreciation of my house while this one is rented, is that right?

2) If I don't deduct the depreciation of my house while this one is rented, I will be losing an advance or opportunity to deduct that in my taxes and get a bigger refund, right?

3) It  will not matter if I deduct or not the depreciation of the house because I will still have to pay taxes (what taxes?) for the depreciation when I sell this one?

I want to understand (learn or have clear) what will be the impact of deducting the depreciation of my house (while this one is rent) if I decide to sell the house in the future (after moving back to this one and live there for a couple of years)?

[Carl]

1) For what I read, I am not force to deduct the depreciation of my house while this one is rented, is that right?

You only depreciate business property. The house you are living in "right now" is your primary residence - not business property. THe house you moved out of and decided to rent *is* one hundred percent business property starting from the day you placed that property "in service" as a rental.  You are required by federal law to depreciate your rental with depreciation starting on the day you placed the property "in service". The in service date is not necessarily the date the renter moved in either. It's typically the day you put the FOR RENT sign in the front yard. Doesn't matter if it took you three months to get a renter in it either.

2) If I don't deduct the depreciation of my house while this one is rented, I will be losing an advance or opportunity to deduct that in my taxes and get a bigger refund, right?

Its obvious to me that you are not interpreting things correctly. Under no circumstances and with no exceptions will you be taking depreciation of any type for any reason on the house you are living in as your primary residence *RIGHT NOW*.

I want to understand (learn or have clear) what will be the impact of deducting the depreciation of my house (while this one is rent) if I decide to sell the house in the future (after moving back to this one and live there for a couple of years)?

I'm more than happy to help you learn and understand the depreciation stuff and how it works both short term and long term. But right now at this moment in time it's important that you understand "clearly" that you do not under any circumstances depreciation "ANY" property you own that is not being used in a business capacity of some sort.

Once I'm convinced you understand this, then I have quite a bit to educate you on so that you "correctly" report things on your 2019 tax return concerning the conversion of your *prior* primary residence to rental property. I can't stress enough the importance of absolute perfection in the first year of reporting rental property. Even the tiniest of mistakes will grow exponentially over time. Then when you catch your error a few years down the road the cost of correcting it can be $expensive$. So since 2019 is your first year reporting rental property on SCH E, perfection is not an option.... it's an absolute *MUST*.

Now don't let that scare you. I assure you that you can do this.

[ColeenD3]

1) The IRS strongly encourages you to take depreciation. It is only taken on a business asset. While you are not forced to do so, you will be penalized if you don't.

2) Depreciation is another expense. Taking it will increase your refund. While other expenses are taken when paid for, depreciaion allows you to take a portion of the value of the house each year.

3)When you sell, you will be required to recapture the depreciation, (add it back into income) whether you took it or not. You do not depreciate a personal home. 

The effect will be that upon the sale, it is added back to the basis of the home which will increase the gain, if any.

[Tony21]

According to Carls respond below my house is consider a business right now.

We only own one house and is the one we are getting rent income from.

We didn't buy any other house. We moved out of the country and rented a place to live in for the next couple of years.

[Tony21]

1) For what I read, I am not force to deduct the depreciation of my house while this one is rented, is that right?

You only depreciate business property. The house you are living in "right now" is your primary residence - not business property. THe house you moved out of and decided to rent *is* one hundred percent business property starting from the day you placed that property "in service" as a rental.  You are required by federal law to depreciate your rental with depreciation starting on the day you placed the property "in service". The in service date is not necessarily the date the renter moved in either. It's typically the day you put the FOR RENT sign in the front yard. Doesn't matter if it took you three months to get a renter in it either.

I understand the house I own which is only one and I am renting it since September 6th is a consider a business now and is the only one I can depreciate.

2) If I don't deduct the depreciation of my house while this one is rented, I will be losing an advance or opportunity to deduct that in my taxes and get a bigger refund, right?

Its obvious to me that you are not interpreting things correctly. Under no circumstances and with no exceptions will you be taking depreciation of any type for any reason on the house you are living in as your primary residence *RIGHT NOW*.

Sorry I should have redacted better this question. I was referring to the house I own and rented on September 6th to someone else (the tenants) not to the place I currently live. 

If I don't depreciate the house that now is considered a business not only I will be violating the law but I will not be getting all the refund I should. That should have been my statement.

I want to understand (learn or have clear) what will be the impact of deducting the depreciation of my house (while this one is rent) if I decide to sell the house in the future (after moving back to this one and live there for a couple of years)?

I'm more than happy to help you learn and understand the depreciation stuff and how it works both short term and long term. But right now at this moment in time it's important that you understand "clearly" that you do not under any circumstances depreciation "ANY" property you own that is not being used in a business capacity of some sort 

Understood, I can only do it for the house I am renting that become a business when I put it under service.

Once I'm convinced you understand this, then I have quite a bit to educate you on so that you "correctly" report things on your 2019 tax return concerning the conversion of your *prior* primary residence to rental property. I can't stress enough the importance of absolute perfection in the first year of reporting rental property. Even the tiniest of mistakes will grow exponentially over time. Then when you catch your error a few years down the road the cost of correcting it can be $expensive$. So since 2019 is your first year reporting rental property on SCH E, perfection is not an option.... it's an absolute *MUST*.

Now don't let that scare you. I assure you that you can do this.

Agreed, that is why I want to do this right and understand the "implications" of depreciation in the future when I sell the house. Right now I am filling the rental/royalty income section with all the info of when I purchased the house that now is considered a business. My understand is that TT is going to help calculate that value.

[Tony21]

Actually it was previous post of someone else that you responded about the personal days need to be zero if you didn't live the house after you rented what triggers all these questions because I was not doing that part util I read your post. 

Beside doing right the SCH E now, can you provide more info in how it will affect in the future any sell or gain?

[ColeenD3]

As I said above, you will have to recapture the depreciation when you sell the property, whether you took it or not. That amount will subtracted from the basis of the property and increase your gain.

Example:

Purchase price $250,000

Sales Price       $300,000

Gain w/o dep    $50,000

Depreciation                      $25,000

Basis: Cost and  dep         $225,000

Sales price                         $300,000

Gain with depreciation       $75,000 

In this scenario, you have taken a portion of that $25,000 each year you rented and add it back to the equation when you sell.

[Tony21]

Thanks for the example and all the information