Treatment of rental property which was converted to personal use

[fkhalilz]

Hello,

In 2021, we converted a property that had been a rental for a number of years to be our primary residence. I'm at the following TT screen:

Q1. Have I selected the right choice above ("No, this property was not rented all year")?

Q2. It is my understanding that I need to pay taxes on the cumulative depreciation taken over the years while this property was a rental (Section 179 recapture). Is this understanding correct?

Q3. Which form do I search for in TT to see if this Section 179 Recapture is accounted for correctly? The reason I ask is because my payable taxes shown at the top of the TT window went up when I entered the information for this property, but the amount of the tax increase was much smaller than I had expected. I am thinking that the Section 179 Recapture is not done correctly.

Thank you!

[JamesG1]

Section 179 recapture is reported on IRS Form 4797 page 2 Part IV.

Q1 This appears to be the correct choice.

Q2 Section 179 recapture does not apply to rental property.  This IRS publication page 17 states:

You cannot elect the section 179 deduction for the following property:

• Certain property you lease to others (if you are a noncorporate lessor).

Depreciation allowed or allowable is recaptured on sale of  the asset.  See IRS Form 4797 page two Part III line 23.

Q3 Does your 2021 Federal 1040 tax return include IRS Form 4797?  If so, the sale of the land is reported on page one Part I and the sale of the improvements are on page two Part III.

You may also be seeing personal property items used in the rental property.

2017 Tax Cuts and Job Act permitted landlords to use section 179 to deduct the cost of personal property items they purchase for use inside rental units, for example, kitchen appliances, carpets, drapes, or blinds.

[Edited 3/8/22 10:42 AM PST]

[fkhalilz]

Thank you for your response.

I now understand that Section 179 does not apply to my rental property. However, I still have a question on the depreciation taken over the years while this was a rental property. Please note that this property was not sold. As I explained earlier, it was converted to personal use in 2021 when I made it my primary residence.

Q1. Do I need to pay back to IRS any amount due to depreciation taken over the years or is this handled when I eventually sell this house in the future?

Q2. I have already answered the TT interview question that indicated it was converted to personal use. I have also made sure my income and expenses are only up to the date when it was converted to personal use. What else do I need to do in TT to ensure I have properly accounted for this conversion? 

[ThomasM125 · Accepted solution]

You don't need to pay back any of the depreciation you were allowed on the property in the current year, assuming you didn't claim any bonus or section 179 depreciation in the current or previous years. It will be used to decrease your cost basis in the house which will increase your gain on sale of the property, so it could affect your tax return when you sell the property. 

You don't need to do anything more that indicate that you converted the property to personal use in TurboTax.