Rental Property Basis of Depreciation Shows Differently on Form 4562

[FelicityZ]

Hello TurboTax Community,

I am having issue with my rental property depreciation basis and would appreciate some help:

The property was converted to rental from primary home on 10/01/2024, so I put 91 days for rental and 275 days for personal use in the basic information;

I purchased this property on 6/28/2019 in Oregon, and lived there for 5 years before renting it out if that matters.

The cost basis from the Assets(depreciation) session was $360,000 (land value $0);

So for the 27.5 year depreciation, I am expecting to see the number for 2024 to be $360,000 /27.5/12*2.5 = $2727.27 for the 2.5 months of rental (since Mid-Month convention, here use 2.5 months instead of 3 months).

However, on form 4562 line 19h column c, the basis of depreciation was listed as $89,496, and the depreciation for the rental 2024 was $678, which were far off and about 1/4 of what those numbers expected to be. Am I misunderstanding the property depreciation?

It looked like TurboTax calculated the rental to personal usage ratio twice here. I searched some previous posts and people pointed out the "personal use after renting it out days" should be 0. But the forms/entries this year looked different. I also tried to modify the basic information session by keeping the rental day 91 only and put 0 for personal use, then it messed up the property tax and mortgage interest on Schedule A as it stopped put the personal proportion there anymore. Please help!

Many thanks!

[JamesG1]

IRS Publication 527, page 23, states:

When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of the FMV or adjusted basis on the date of conversion. 

FMV

This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the FMV of the property. 

Figuring the basis

The basis for depreciation is the lesser of: 

• The FMV of the property on the date you changed it to rental use; or 
• Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. 

You do not mention a fair market value of the property.  The basis computed by the software was computed based upon the computation of 91 days / 366 days of the year.

[FelicityZ]

Hi James,

Thanks for your reply. The FMV is $360,000 and the net RMV is $335,380 from the property tax statement. With the lower one, the number of the basis of depreciation is still very off.  The depreciation basis number TurboTax filled on the form 4562 is $89,496, which is close to $360,000 * 91/366, that it took the whole value and only considered the rental days portion from 2024, and it's not right. Many thanks!

[FelicityZ · Accepted solution]

So, after more digging and a few experiments with the rental property session, I found a workaround of this issue:

When putting the information of the rental property, only put the days for rental and leave the personal usage day as ZERO, then manually modify the federal deduction part for property tax and mortgage interest by multiplying the "primary home days / total days of the year" ratio, and put the "rental days/total days of the year" part into the rental property expense session.

It turned out that the "personal usage" days in the rental property session will automatically calculate the federal deduction part for property tax and mortgage interest, but it will use the same ratio on the entire rental property expenses and depreciation later, which is buggy.

To get the expense and depreciation correct, especially for the first year converted to rental property, just input the exact rental usage days and leave the personal usage day as zero, in this way, you will have to split the mortgage interest and property tax into two parts, and fill them separately into the rental property session as well as the federal deduction (Schedule A), but at least you will get the expense and depreciation correct for the long term.