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?

[Carl]

@TaxGuyBill  Actually, so long as you own the property, if you do all t hat converting it back and forth between rental and personal use, each time you convert back to rental, you pick up depreciation where you left off. There's no vagueness about that really. That's one of the reasons the program will ask you for "prior depreciation already taken" any time you convert from personal use to rental.
For example, it will ask for prior depreciation the first time you convert to rental, because you have to include any depreciation you may have taken on the property if you claimed a home office on SCH C in prior years. You and I had some banter back and forth on that particular scenario about 3 years ago I think, when I was concerned the first year of rental depreciation was to high. I thought the program was "making up" for depreciation not taken on SCH E in a prior year (as opposed to the HO depreciation that was taken on SCH C). But you showed me how the program's figures were spot on, through the worksheets.

[TaxGuyBill]

Let's use this as an example:  You purchased a home on January 1st, 1990, and immediately rented it for 1 year.  You then used it as your Main Home for the next 26 years.  On January 1st, 2017, you move out and rent it again.

What do you enter for the "placed in service" date?

[Carl]

The "placed in service" date would be Jan 2, 2017. Then the program on later screens will ask for any prior depreciation aleady taken. You enter the total depreciation taken on the 1990 tax return.

[TaxGuyBill]

Okay, I see we are thinking the same, but wording it differently.

Entering January 2nd, 2017 is what I call "restarting" depreciation, as you are restarting the 27.5 year period using the Adjusted Basis (you don't enter "prior depreciation", but you enter the Adjusted Basis, which has been reduced for the previously used depreciation,and make notes in the file about the prior depreciation for whenever it is sold).


The other viewpoint would be to 'start where you left off', by depreciating it over 26.5 more years (you already 'used' one year).

[Carl]

I just worked through such a scenario and me thinks I found an issue. Lets continue this discussion elsewhere, and I'll tag you.

[husky96821]

I'm in a similar situation here and wanted to know the appropriate treatment. Any change to the way you described in this thread?

[swuelfing]

Hi, I'm trying to understand. If you buy a house in 2022, rent it for 3 years, then live in it 2 years, then rent it again for 2 years, then sell. The capital gain on the sale is excluded up to the $250k or $500k? And that's because 1) it was primary residence for 2 of last 5 years and 2) last person to move out is a renter. And you still get the exclusion even though it did initially start out as a rental? So it doesn't matter if it starts as a rental as long as you live in it as primary residence for 2 of last 5 years AND the last person to move out is a renter?

[Critter-3]

@swuelfing   That is correct EXCEPT you must still recapture the depreciation allowed or alloable on the time it was a rental.  This cannot be excluded. 

[swuelfing]

Ok, then just to be sure: Say you buy a house and rent it for many years, say 10 years. If you want to sell with the full $250k/$500k LTCG exclusion, then you need to move in and use as primary residence for 2 years. Then you need to rent it again say for a year or 2 so that the last inhabitant was a renter. Now you can sell with the full exclusion?

[Critter-3]

Just moving in for 2 years is enough ... you do NOT need to rent it out again.  

[swuelfing]

I thought that if you rent for a while then move in for 2 years prior to selling, you have to pay LTCG tax on the percentage of time it was rented

[Critter-3]

Not quite right ... you must  recapture the depreciation allowed or allowable on the time it was a rental as ordinary income not cap gains.    This cannot be excluded.