Why do I get a depreciation deduction that is about 10x larger than TTax when I take 27.5 year depreciation and prorate it for 19 rental days on my residence?

[schmieder1612]

TTax  correctly treats it as rental business income on Schedule E and form 4562.

[Vanessa A]

How did you calculate the depreciation for 2021?  If you put the property in service in 2021, did you account for the mid year or half year depreciation.  

If you start using a property during a tax year that first year, the depreciation will likely be half of what it would be for the rest of the years.  Example. If you bought a house for $100,000 depreciation for all years but the first and last would be $3,636 using straight line method.  The first and last year the depreciation would only be $1,818. 

[schmieder1612]

This example should help: I built the house  for $125,000 in 1980 on my pre-owed property.  I then prorated it for the 19 days of rental by multiplying it by 19/365 = 0.0521.  Then to get the basis I took 0.0521 x $125000 = $6507 which is the number I expected to find on Schedule E, Form 4562, Line 19 column c, Basis for depreciation.  By comparison they by got $5210, i.e. about $700 more.  Then I  divided my $6507 basis by 27.5 years = $237 for my deduction in Column 19g.  By comparison TTax got $24 by whatever mysterious method they were using.  What did I/they do wrong?

[schmieder1612]

Another example illustrates that an 8 year old addition/remodel didn't make much total difference to their computational approach compared to the 41 year old basic residence, in case that age was an issue.  I  did the remodel in 2013 for $150,000.  The basis for was computed as 19/365 => 0.052 x $150,000 = $7808.  That compares more favorably to the TTax result of $7815 for only a minor difference compared to the $1297 smaller result they got for the 41 year old house above (I mistakenly said they got about $700 more) and suggests there maybe was a property age explanation involved.  But then I calculated the deduction as $7808/27.5 yrs = $284.  Yet TTax got  the vastly different deduction result of $36 which was lower than mine by 8x versus the 10x difference from the 41 year old property.  So from an age standpoint the overall differences were not that much.  Incidentally, in case the type of rental makes a difference, my rental was to NBC Universal Content Productions for 2 episodes of a 5 episode Hulu movie film.  The period was from 11/24/21 to 12/31/21.  So while the span was 38 days, they were only in my house for a total of 19 days sporadically spread over that time.  The total rental period extended into 2022 for another 8 days spread over 1/11/22 to about 2/23/22 when they filmed the remaining 3 episodes.  Since that period was less than the 14 day exclusion period I don't believe I will have to pay taxes on it in 2022.

[schmieder1612]

After much digging into depreciation tax law, I finally found an explanation that other short term rental hosts might find useful.  Current convention requires using Straight Line (SL) depreciation which nominally uses the same depreciation percentage each year over the required 27.5-year depreciation period.  But it turns out that SL depreciation is very misleading.  The catch is what they allow in any one year.  There, the required depreciation switches to what I call "Bent Line" depreciation.  For instance, if my 19-day rental period were in January, the IRS Schedule E, Form 4562 Instructions for line 19g, on page 10, describe how to calculate the deduction using 3 steps.  Step 1 took me to the SL method, Step 2 required me to divide my basis (already reduced by the ratio of 19 days/365 days) by 27.5 years.  Step 3 solved my mystery by requiring me to use their mid-month (MM) tax table where I had to multiply, the already twice reduced step 2 deduction, by an even steeper x 0.125 because my rental period started in November.  If it had started, say, in January I would have had to only multiply by 0.9583.  Why? Because the intra-year depreciation rule uses the "Bent Line" convention where, unlike yearly increments which are constant, the monthly increments are bent to drastically drop from January to December.  This effectively means that renter wear and tear depreciation is almost fully allowed if it happens in January but - look out if your do your short-term rental in November - because there it is reduced much more by x 0.125.  (As if the later the month it occurs in somehow mitigates the depreciation effect of having renter wear and tear on your property!)  I wonder if the tax law is written that illogically or if the IRS just interprets it that way, but it makes no sense to me.  To test my theory, I moved the rental start date in TTax to 1/24/2021 instead of the actual 11/24/2021 date and, sure enough, I now get about the same $280 deduction (vs. $36) that TTax does for my $150K remodel in 2013.  So, to TTax's credit and credibility, they do seem to be applying the regs correctly (as illogical as they are).  The only things I would like TTax to do differently are to explain this a little better to rental novices like me and to fix their "tax guidance" error which now takes users to the wrong Form 4652 instructions page for line 19g.  It now sends you to the page for line 16 instead and thus forces you to rely on searching externally for 19g.