Depreciation Calculation for rental to personal use to rental property again

[walkerkc2]

Single family home converted to rental property on 15 Jul 2003. Converted to personal use on 16 Nov 2015. Converted back to rental on 1 April 2020. Total depreciated while a rental property was $229,499, of which $55,518 was not allowed.  How do I enter this in Turbotax  for my 2020 taxes? 

[DaveF1006]

It depends. What is the basis amount that is being depreciated? Also, why was $55,518 disallowed?

[walkerkc2]

Dave,

Cost basis was $513,512.  Used turbotax to compute the details over the years (cut and pasted summary below). Appears that some years I was not allowed to deduct all the depreciation because income was too high.

Keith

			YEAR	MACRS YEAR	PROPERTY	Depr (S/L)	Total Passive Suspended Losses	Cumulative  Suspended Losses	Unallowed Depreciation	Cumulative  Unallowed Depr	Unallowed Operating Loss	Cumulative  Unallowed Operating  Losses	Double Check Cumulative  Suspended Losses
Purchased as primary residence:	16-Aug-02		2003	0.5	HOUSE	$   8,559	$                   -	$                   -	$                   -	$               -	$               -	$               -	$                   -
Purchase Price	$741,427		2004	1.5	HOUSE	$ 18,673	$              3,050	$              3,050	$              3,050	$         3,050	$               -	$               -	$         3,050.00
Placed into service as rental property	15-Jul-03		2005	2.5	HOUSE	$ 18,673	$            (3,050)	$                   -	$            (3,050)	$               -	$               -	$               -	$                   -
Cost basis	$513,512	($741,427 purchase price less $227,915 land value)	2006	3.5	HOUSE	$ 18,673	$                   -	$                   -	$                   -	$               -	$               -	$               -	$                   -
Depreciable basis	$513,512	27.5 year life	2007	4.5	HOUSE	$ 18,673	$            24,947	$            24,947	$            18,673	$       18,673	$         6,274	$         6,274	$       24,947.00
Total depreciated while a rental property	$229,499	(15 Jul 03 – 15 Nov 15)	2008	5.5	HOUSE	$ 18,673	$              7,017	$            31,964	$              7,017	$       25,690	$               -	$         6,274	$       31,964.00
Returned to service as primary residence	16-Nov-15		2009	6.5	HOUSE	$ 18,673	$            19,511	$            51,475	$            18,673	$       44,363	$            838	$         7,112	$       51,475.00
Returned to rental property	1 April 2020		2010	7.5	HOUSE	$ 18,673	$            16,374	$            67,849	$            16,374	$       60,737	$               -	$         7,112	$       67,849.00
Depreciation  method	SL		2011	8.5	HOUSE	$ 18,673	$            10,241	$            78,090	$            10,241	$       70,978	$               -	$         7,112	$       78,090.00
Depreciation convention	MM		2012	9.5	HOUSE	$ 18,673	$            31,163	$          109,253	$            18,673	$       89,651	$       12,490	$       19,602	$     109,253.00
Capital Improvements (New Kitchen 12 Feb 2016)	$      44,333		2013	10.5	HOUSE	$ 18,673	$          (16,548)	$            92,705	$                   -	$       89,651	$     (16,548)	$         3,054	$       92,705.00
Capital Improvements (New Roof 28 Apr 2017)	$      14,915		2014	11.5	HOUSE	$ 18,673	$          (37,187)	$            55,518	$          (34,133)	$       55,518	$       (3,054)	$               -	$       55,518.00
Total Capital Improvements Basis	$      59,248	27.5 year life => $2,154 depreciation per year)	2015	12.3	HOUSE	$ 15,537	$                   -	$            55,518	$                   -	$       55,518	$               -	$               -	$       55,518.00

[DaveF1006]

After conferring with my colleagues, I need to edit my original answer. Pursuant to 26 CFR § 1.168(i)-4 - Changes in use. | CFR | US Law | LII / Legal Information Institute (cornell.ed... and from the posts that CollenD3 and AmeliesUncle has posted, I must revise my original answer but in simpler terms.

1. You will begin depreciating the property as of April 1, 2020., which is the date you placed it into service.
2. For the depreciable basis, you will use either your adjusted basis in the property or the Fair Market Value (FMV), whichever is less. You may still use the 27.5 straight-line depreciation method.
3. You will need to reduce your depreciable basis by the amount of depreciation you have already taken.  It mentions in that Cornell University link that included above that "Upon the conversion to personal use, no gain, loss, or depreciation recapture under section 1245 or section 1250 is recognized. However, the provisions of section 1245 or section 1250 apply to any disposition of the converted property by the taxpayer at a later date." This means that the depreciation recapture will be implemented if you dispose or sell the property later on. Meanwhile, all your deprecation you already taken previously is captured by reducing your depreciable basis in this latest conversion. 

1.  

[AmeliesUncle]

I disagree with the answer above.  You need to restart the 27.5 years for depreciation, using the 2020 date and the lower of (a) the Adjusted Basis or (b) the Fair Market Value of the property.

You would enter 2020 as the "placed in service" date, and Adjusted Basis (purchase price, plus capital improvements, minus the depreciation).

Be sure to also enter your Passive Loss Carryover (hopefully TurboTax will let you do that, without giving you an error).

[walkerkc2]

I specifically asked my tax accountant about this a couple of months ago ("do I start over with a new 2020 cost basis when I put the property back in service of rental property?"). He told me "no" -- I can not start over but must go  back and pick up depreciation where I left off.

[AmeliesUncle]

Tell your accountant to look at Regulation §1.168(i)-4(c).

That says conversion to personal use is treated as a disposition for purposes of depreciation (but no gain or loss is to be calculated).

Because the conversion to personal use is treated as a disposition, when you start using it for business again you need to restart the 27.5 years (using the ADJUSTED Basis).

[ColeenD3]

Regs. Sec. 1.168(i)-4 provides the rules for determining the depreciation allowance for MACRS property when the use changes in the hands of the same taxpayer. Use changes include when property is converted from personal property to business or income-producing use and vice versa, and when the change in the use results in a different recovery period and/or depreciation method. The allowance for depreciation under this section constitutes the depreciation deductions permitted under Sec. 167(a).

A change in the use of MACRS property occurs when the primary use of the MACRS property in the tax year differs from that of the immediately preceding tax year. The primary use of MACRS property may be determined in any reasonable manner that is consistently applied. If the primary use of MACRS property changes, the depreciation allowance for the year of change is determined as though the use had changed on the first day of the year of change.

If a change in use results in a longer recovery period and/or less accelerated depreciation method than before the change in use, the taxpayer must compute the depreciation allowance using the longer and/or less accelerated depreciation method in the year the change in use occurred.

[walkerkc2]

Coleen,

So you and Amelies Uncle say that I should take the market value of the house (less land) effective1 Apr 2020 (the date I put it back into rental service), add the cost of the new roof and new kitchen to arrive at an adjusted basis, and begin depreciating the whole anew.  I should ignore any previous depreciation from 2003-2015 when it was previously a rental property -- this a completely new event for taxes now.

Check or hold?

Keith

[AmeliesUncle]

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@walkerkc2 wrote:

Coleen,

So you and Amelies Uncle say that I should take the market value of the house (less land) effective1 Apr 2020 (the date I put it back into rental service), add the cost of the new roof and new kitchen to arrive at an adjusted basis, and begin depreciating the whole anew.  I should ignore any previous depreciation from 2003-2015 when it was previously a rental property -- this a completely new event for taxes now.

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NOT the Market Value, the Adjusted Basis (unless the Market Value is less than the Adjusted Basis).

[ColeenD3 · Accepted solution]

You can't just ignore the previous depreciation. You got a tax benefit for it. You will also have to adjust the basis with the depreciation you took.

You would enter 2020 as the "placed in service" date, and Adjusted Basis (purchase price, plus capital improvements, minus the depreciation).

[walkerkc2]

One last problem. My New Basis for 2021 = Old basis - Cumulative Depreciation + Capital Improvements =  [phone number removed]99+44333+14915= 343261. while i entered all info correctly, Form 4562 in Turbotax says basis is $257926. Why?

[ColeenD3]

What numbers are what?

I don't see depreciation being deducted.

[walkerkc2]

Coleen,

the numbers I used:

Purchase price   741427

land                    - 227915

depreciation     - 229499

new rood           + 14915

new kitchen       + 44333

adjusted basis = 343261

why does turbotax come up with a different # for basis?

[ColeenD3]

How are you entering these figures. As a new rental, just being placed in service, the only entries can be adjusted basis (calculated by hand) minus the land. While there are many different screens asking for detail, these tend to be more for people who don't understand the calculations. Your beginning basis is $571,176 for the building and $227915 for the land. 

Just keep VERY detailed records of all these calculations.