topic My recommendation is to go with option 1. Report the prop... in Investors & landlords

Owner-occupied duplex convert to rental, how to report depreciation properly?

oops821 — Thu, 06 Jun 2019 16:02:30 GMT

Hi all, I'm owner-occupying one unit of a duplex and I'm wondering what is the best to report the depreciation if I convert the owner-occupied unit into a rental at a later date. The challenge I'm having is specifically regarding their depreciation schedule - since they are bought into service at different times, the depreciation schedule are different.

I can see a few options that could achieve this, but none is perfect:

1) treat the two units as two completely different properties with their own Schedule E's (each with half of the cost basis). This way the depreciation can be calculated correct, however, I'm unsure where to put improvements that applies to both units (e.g. a roof replacement).

2) put the duplex in one single Schedule E, with it's full cost basis, however, in the Asset Worksheet, report 50% of "Percentage of business use" then bump it to 100% for the year that the conversion happens. However, the "Percentage of business use" does not seem to apply to "I - Residential Rental" per the instruction on the right.

3) put the duplex in one single Schedule E, with half of its cost basis. In the year of the conversation, change the basis to the full basis.

For #2 and #3, how can I capture the fact that the two units were put into service in different years and thus should be depreciated differently?

Really looking forward to some help here, thanks in advance!

My recommendation is to go with option 1. Report the prop...

AnnetteB — Thu, 06 Jun 2019 16:02:32 GMT

My recommendation is to go with option 1.

Report the properties as two separate entities on Schedule E. If/when the time comes to replace the roof or another component of the duplex itself, enter the Asset on both properties, but use half the cost for each one.

Thanks Annetta, can you confirm whether I should use two...

oops821 — Thu, 06 Jun 2019 16:02:33 GMT

Thanks Annetta, can you confirm whether I should use two Schedule E's, one for each unit, or should I have one sechdule E with two different assets in it? What's the pros and cons?

In TurboTax, you will enter each side of the duplex as it...

AnnetteB — Thu, 06 Jun 2019 16:02:35 GMT

In TurboTax, you will enter each side of the duplex as its own property. So on the screen you will see two Schedule E entities. It may appear that you will have two Schedule Es, but the reality is that one paper Schedule E will report up to 3 properties.

The pros for doing it this way, as two separate properties, is simply to keep everything separate. They can have different dates placed in service without trying to manually prorate depreciation and expenses. I cannot think of any cons, other than the rare occasion where you will need to prorate an expense that is truly for both properties (like your roof example).