Hi RA2022,
Thank you for joining us.
There is a lot to unpack here, so I will try to cover everything.
First off, yes you are correct in that you must take depreciation on the condo in the year(s) that it is used for business use - i.e. rented out. You generally will not have any issues if you fail to do so, however, the revenue code states that if and whenever you sell the condo, you must recapture any depreciation allowed or allowable. This means, if you failed or opted to not take depreciation, you must still claim it as income in the year that you sell the asset.
Next, in order to calculate depreciation, you must first establish the asset's (your condo) adjusted basis. This is going to be the lessor of the original basis (purchase price) plus any capitalized improvements (think major items such as a new roof, remodel, new appliances, etc.), or the fair market value when it was placed into service (first started renting). For the most part, real estate goes up in value over time rather than going down, and usually the adjusted basis is the former rather than the latter. However, you should probably consult a realtor if you have any questions about its fair market value. Please keep in mind that if you own any part of the land underneath the condo, these are treated as two different assets, and land is not depreciable for tax purposes. If you do own any part of the land, you will need to allocate the basis between the building and the land.
Next, will come the calculation of depreciation. Since you posted a rate of 3.182%, I will assume that you started renting it out in February. This rate also assumes that you rented it out through the end of the year. You will need to multiply this rate by the adjusted basis to come up with the amount of depreciation for the year. This will get reported on Form 4562 line 19h, and line 22. That will get carried over to your Schedule E, line 18.
If this deduction is results in a net loss for the rental, then it is considered to be a Passive Activity Loss (PAL). This will need to be reported on Form 8582. Generally speaking, PAL's are not deductible, rather they are carried forward indefinitely to offset any future income from the same activity, or the asset is sold. However, there is a special provision for rental PAL's that states you may be eligible to deduct up to $25,000 of PAL losses if your modified adjusted gross income (MAGI) is under $100,000. The $25,000 amount gets reduced by $1 for every $2 MAGI over $100,000 and is completely phased out at a MAGI of $150,000. The form 8582 will be used to also show any unused carryforward in future years.
Finally, if and when you sell the condo, you will be required to recapture the depreciation. This will be done on Form 4797 to report the sale of a business asset. If you still have any unused carryforward of PAL losses at that time, you will be able to deduct them, allowing you to offset some if not all of the reportable income resulting from the depreciation recapture.
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