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We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

 
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26 Replies
Carl
Level 15

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

I am making some assumptions here, so you will need to set me straight if my assumptions are wrong. But overall I can definitely help here.
I am assuming this was a rental property before, then you moved into it and made it your primary residence. Then in the future you are planning to purchase another house, move in to it and make the current property a rental again.
When did you move into the current property?
When did the last renter move out of it before you moved in?
Where did you live before you moved in to the current property? A home you owned and got foreclosed on maybe? A place you rented?
Basically, I need a timeline here so I don't waste your time with information that not only doesn't apply to your specific situation, but will just confuse you more.

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

We purchased the property in May 2015 and rented it immediately.  We lived in a a home in Albuquerque which we sold in 2016, moved to our vacation property for one year.  We moved into the rental property in July 2017 when the renter moved out.
Carl
Level 15

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

I love it when folks provide "the facts" without all the drama. Makes it simpler on all of us, so thanks for that. 🙂

I am assuming you have not yet filed your 2017 tax return, or if you did you handled it as I'm outlining here.

On the 2017 tax return when working through the rental, on the 2nd or 3rd screen in there's a screen with a checkbox on it for "I converted this property from a rental to personal use in 2017". You must select that option, and any others that apply on that screen. If there are passive loss carry overs from 2016, you will find that figure on Form 8582, Worksheet 6, Column b in your 2016 tax return printout.

Continue working through the rental "as normal" to report all of your rental income/expenses received in 2017. Work the program in order the way it's designed and intended to be used. This ensures you don't miss anything. If you jump around in the Rental & Royalty Income (SCH E) section of the program, you could quite easily miss something that will result in your return being wrong. So read every word on every screen before making selections. Understand also that the wording matters. There is a vast difference between "select the one that applies" and "select all that apply". So watch that.

In the rental expenses section you can only claim those expenses incurred while the property was classified as a rental. Expenses incurred after the last renter moved out are flat out not a deductible rental expense. This means you will have to pro-rate the property insurance. You can claim 1/12 of the property insurance for each month the property was classified as a rental. Property insurance for the period it time it was not classified as a rental is not deductible anywhere on your return.

For the mortgage interest, read the screen. Depending on your selections on prior screens, the program will tell you if you need to enter the total amount of mortgage interest reported on the 1098 Mortgage Interest Statement (In which case the program will do the pro-ration for you) or if you need to pro-rate it yourself. (I always recommend let the program do it for you.)

Once done with the Rental income and expenses section, the next section is Assets/Depreciation. This is where the "real" conversion takes place. You have to work through each individual asset listed in that section, one at a time. When asked "Did you stop using this asset in 2017?" You must select YES.

For the "Date of sale or disposition" enter a date that is one day *after* the last renter moved out. Then continue.

On the "Special Handling Required?" screen, read it to understand why I am telling you to click YES. Then click YES.

Now click Continue, and you're returned to the list of assets. If listed, click on the next asset in the list and work it through the same as you did the first asset. Your "date of sale or disposition" must be identical for all assets.

Once you've worked through all assets to show their removal for personal use, click the DONE button to leave the Assets/Depreciation section and keep working things through.

Now if at any time you owned this property you claimed vehicle expenses, you must work through the Vehicle Expenses section and show the disposition of the vehicle. That too will be "removed for personal use" same as the assets were.

When finished, click Done With Rental Property and finish working through the rental property section.

Once you have completed and filed your taxes and they have been accepted by the IRS, there are some forms you will need to print and keep. Without these forms, you will have problems if you convert the property back to a rental in the future, sell it, or you die. So print these forms and keep them in a safe place. I can guarantee you one hundred percent that you *will* need these forms at some time in your future. There are no exceptions either.

First, select the File tab at the top center of the program. Under that select the "Print/Save for your records" sub-tab.
Click the Save as PDF button.
Then click the "Forms to review or keep for your records" and under that select "Tax return, all calculation worksheets".
Now click the "Save as PDF" button. Pay attention to where the PDF file will be saved. By default, unless you change it, it's being saved to the documents/turbotax directory. Change the location if you like, then click the Save button.

Once saved, you can close/exit the TurboTax program entirely. Then open the PDF file you just saved. You need to print out the IRS Form 4562's for that rental property you just converted to personal use. There are three of them for that property. One prints in portrait format and the other two print in landscape format. You need the two that print in landscape format. One is titled "Depreciation and Amortization Report" and the other is titled "Alternative Minimum Tax Depreciation Report". Print and keep both in a safe place.

The next document you need is the Form 8582. If you do not have any passive losses to be carried over to next year, then this form will not be generated. So with the return open in the Adobe Reader program press CNTL + "F" to open the search box, enter "8582" and search for it. If you don't find it, then you don't have any carryover's to deal with. If you do find it, then print it. You want to keep Form 8582, Worksheet 6, Column b.

Store this information with your hard copy of your 2017 tax return. (I assume you do keep a hard copy of your returns each year, and don't depend on the technology to save your arse when you need it in the future.) You will without question, need this information in the future, if/when you convert the property back to a rental.


We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

Thanks, Carl. This is exactly what I did for 2017 taxes. Wasn't looking for technical answer but tax answer. Since we will be moving again, we are trying to determine which is best for our situation: rent the home again or sell it and does the time we live in the home make a difference? Guess the issue is how the depreciation will be handled in either case.
Hal_Al
Level 15

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

You say you  lived in the home less than two years. None of the capital gain will be excludable .  However, if you wait for the required two years, before selling, you will be allowed a partial exclusion of the capital gain from a sale.
However the gain must be allocated between rental time and time it was your principal residence. The depreciation recapture is fully taxable.
Using an example, if you owned the home 5 years and lived in it 2 years, 40% (2/5) of the gain, not including depreciation, would be excludable.  Carrying the example further, if you sell it for $100,000 and had paid $50,000 and took  $10,000 depreciation; $20,000 of your $50,000 capital gain (40%) would be exempt from tax under the home sale exemption. $30,000 would be taxed at long term capital gain rates and the  $10,000 depreciation recapture would be taxed at section 1250 rates

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

What if we rented it
Carl
Level 15

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

Basically, if you lived in the home for at least two of the last five years you owned it, counting back from the closing date of the sale, then you qualify to exclude the first $500K from capital gains tax. ($250K if filing single or MFS).  Now understand that even with that, you will pay tax on the recaptured depreciation no matter what. There is no exception for that.  So if you move out (weather you sell it or not) before July of 2019, then you do not qualify for any capital gains tax exclusion.
Carl
Level 15

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

Basically, assuming you do meet the "lived in last 2 of 5" requirement, weather you get the full exemption or partion exemption, depends on how the property is classified at the time of the sale. If you are the last one to move out prior to the sale, then you have "unqualified use" that will reduce the exemption amount. If the renter is the last one to move out and you still meet the requirement, then the full $500K is excluded.
Hal_Al
Level 15

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

If you continue to rent it; you continue to report income and expenses, including depreciation, on Schedule E. if you later sell it, it depends on where you are on the 2/5 year window whether you could still exclude part of the gain.

@Carl - whether the owner gets a full or partial home owner exemption depends on when the unit was rented. If it was only rented after it was used as his principal residence, he gets the maximum exclusion. But if he occupied the unit, as his home, after previously renting it, he has to allocate the gain. In addition, it's only "non qualified use" after 2008, that is prorated

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

If we rent it for two years, live in it for two years then rent it for three years then sell, the Full $550k is excludable and tax is due on all depreciation?
Carl
Level 15

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

You got it. I sometimes get the full exclusion/partial exclusion rules reversed myself, as Hal-Al pointed out. 🙂
Hal-Al, I saw no need to bother mentioning the 2008 thing, since it was made clear they didn't own it until May of 2015. For this thread, that's just "informational clutter".

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

Sounds good but....we will be moving into another rental property that will have been rented for 2 years, then we sell and purchase a smaller home after living in it for two years. Could you verify how this is treated. Partial exemption?

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

"If we rent it for two years, live in it for two years then rent it for three years then sell, the Full $550k is excludable and tax is due on all depreciation?"

No.  Because you moved into it after it was rented, those first two years are "non-qualified use".  That means you could only exclude 5/7ths of the pre-depreciation gain (7 years of total ownership).

@Carl   The 2008 thing definitely applies.  It applies to periods AFTER 2008 that it was not their Main Home, so that means it would apply to renting in 2015.

We moved into our rental property and now, less than two years later, want to rent it again and purchase another primary home. How is this treated for tax purposes?

I think your original question is about the depreciation for the second period.  Is that correct?

There is some dispute for how to handle it.  Some say to re-start the 27.5 year depreciation period (by entering the second/current "placed in service" date), and others say to start it off where you left off (which takes some creative work-arounds in the software).

I have vacillated back and forth for which is the proper way to go.  I originally though you should start where you left off.  Then I leaned towards restarting it.  Recently, I found a law that said that if you sold the property and re-took the property, you should start off where you left off, which MIGHT indicate that should be the general procedure.
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