Does my new well qualify for Bonus Depreciation?

[ladykat]

I have an older rental on a small piece of land. It's been a rental for over 15 years. Last year I had to have a new well installed, to the tune of almost $30.  When entering the cost of the asset into TurboTax to be depreciated, the software tells me I qualify for a Special Depreciation Allowance of 80% of the cost!  I was delighted but also hesitant to believe it.  If I truly qualify for this larger deduction, I want to know that it is in fact allowable, even if I decide to start using the property as my primary residence in this coming year. Are there any rules related to the continued use of the property as a rental? Am I really able to realize this large deduction one year and then stop using the property as a rental the next year?

I appreciate your input.

[DaveF1006]

Yes, a water well generally has a 15-year depreciation schedule and is eligible for bonus depreciation as long as it remains a rental. If you decide to convert your rental into a personal residence, if you sell your house, the depreciation that you claimed will need to be recaptured at the time of the sale.

Your tax strategy at this point is if you plan on selling your house sometime in the near future, you may reconsider claiming the bonus depreciation and take regular depreciation based on the 15-year recovery period. There will be less depreciation to be recaptured in this instance. Just an FYI here.

[ladykat]

Thank you Dave!  I understand you when you say "the depreciation you claimed will have to be recaptured at the time of sale."  I have no plans to sell my property. But how is this recapture achieved if I decide to keep it as my primary residence rather than continuing the rent it out? Is this something that TurboTax will automatically calculate next year if I report that the property is no longer used as a rental? Will it then adjust the bonus depreciation on my next year's return? 

I appreciate your knowledge and input!

[DavidD66]

No, if you convert your rental to your primary residence that will not result in a taxable or event.  The amount of depreciation you have claimed (or were eligible to claim) becomes taxable at the time time you sell the property, subject to the amount of gain you have on the property.  So, if you never sell the house, you will never have to deal with the depreciation recapture.  On the other hand, if you sell the house in what would otherwise be a not taxable transaction because it is your primary residence, then you would owe tax on the amount of depreciation you claimed, or could have claimed.  If the gain on the house (even if it isn't taxable) is greater than the amount of depreciation, then 100% of the depreciation is subject to the recapture tax.  The amount of depreciation subject to recapture is limited to the amount of gain on the sale.