Rental Property Depreciation adjusted for part time use.

[MTVacation]

When our rental property went into service it was our primary residence with vacation rentals a few weeks each year.  Over time we moved away and the property became a full time rental.  As a result the total amount of depreciation taken is less than if we had been fully depreciating every year.  Now that I am trying to return to TurboTax to do my returns, the software is calculating a depreciation amount much higher than correct amount.  To be more clear - basis divided by 27.5 years is approximately $5000 but TurboTax is subtracting depreciation already taken from basis and dividing the balance by remaining years for approximately $8000.  How do I get TurboTax to report the $5000 amount instead of accelerating depreciation with the $8000 amount?

Thanks in advance to anyone that can answer this.

[Carl]

Your "in service" date is the date you made it available for rent as a long term rental. I assume that was in 2022.

Your cost basis in the property is what you paid for the property when you originally purchased it, plus the cost of any property improvements you paid for after you purchased it, *minus* the total amount of depreciation taken in the past.

Then depreciation starts over from year 1, for the next 27.5 years based on that adjusted cost basis.

It is up to you to keep track of all depreciation taken prior to converting it to a long term rental, as the program can not do that for you.

[MTVacation]

Thanks for that information. It sounds like maybe because we have disallowed depreciation due to personal use that TurboTax will not be able to calculate correctly or allow the correct amount to be manually entered.  We have perfect records of basis, in service date, depreciation allowed and depreciation disallowed (personal use days).  The property has been a seasonal vacation rental for 17 years.  Some of those years have had personal use.  Most of those years, including the last 10, had no personal use.  Now that I am trying to file with TurboTax it is adding the previously disallowed depreciation evenly divided into the remaining 10.5 years.  This would result in claiming approximately $3000 too much depreciation each year if there is no way to override the automatic calculation.  So is there a way to enter the correct $5000 depreciation instead of the automatic calculated $8000 amount?

[Carl]

First, here is some assumptions I am making based on my understanding of the information you have provided thus far.

When our rental property went into service it was our primary residence with vacation rentals a few weeks each year.

Either you reported it as a rental for the entire tax year, every year during that time, with days rented each year being greater than zero, and days of personal use being greater than zero with the total days each year never exceeding 365 days, OR:

You converted from personal use to rental use, then back to personal use every single year during the years it was your primary residence.

Typically, if you did the latter, that would mean that depreciation taken each of those years it was your primary residence was not the same. But it very well could have been, even though the likelihood of that is low since you specifically stated that "Some of those years have had personal use."

Most of those years, including the last 10, had no personal use.

That indicates to me that the property has been classified as a rental with 100% business use and absolutely no personal use what-so-ever since 2012, give or take a year.

Now here is where it appears to me, a misunderstanding of tax law on your part comes into play.

It sounds like maybe because we have disallowed depreciation due to personal use that TurboTax will not be able to calculate correctly or allow the correct amount to be manually entered.

Assuming 2022 is the first tax year you're using TurboTax, and based on your statement of no personal use for the last 10 years, there is no personal use what-so-ever to deal with in TurboTax on your 2022 return.

Now that I am trying to file with TurboTax it is adding the previously disallowed depreciation evenly divided into the remaining 10.5 years.

Either I wasn't clear in my earlier post, or you didn't quite read it entirely or correctly. There is no "remaining 10.5 years" of depreciation. Your depreciation starts over from year one, using the adjusted cost basis. So let's use an "EXTREMELY" simplified example.

Tax year 2000 you convert the property to a full time rental that is 100% business use. We'll use an arbitrary cost basis of $300,000 with $200,000 allocated to the structure. Since land is not depreciated, the $200,000 structure is depreciated over the next 27.5 years.  Assuming you placed it in service on Jan 1, 2000 the first year depreciation amount is $6,084, and depreciation for years 2001-2005 is $6,350 each of those years.

In 2005 you convert the property back to personal use on Dec 31, 2005 and move back into the property as your primary residence on Jan 1, 2006. Depreciation therefore stopped permanently on Dec 31, 2005. The total depreciation taken on the property at this point is $37,834.

On Jan 1st 2012 you convert the property back to a full time 100% business use rental. Your new cost basis for this is your original cost basis *minus* the total of all depreciation taken before. So that would be $300,000 minus 37,834 which is $262,166.

The value of the land does not change since land is not depreciated. So your cost basis in the land is still $100,000 and your adjusted cost basis in the structure is $162,166.  The amount of $162,166 is what gets depreciated over the next 27.5 years with 2010 being year one. 

So for 2012 assuming an in service date of Jan 1, 2012, the depreciation taken will be $4,933. Then, for each year after that the depreciation taken will be $5,149 for each year, assuming no personal use and 100% business use each and every year.

Therefore, the depreciation taken to date since Jan 1 2012 would be $56,423 (that includes the $5,149 of depreciation for 2022). At this point, you ahve 17.5 years left to fully depreciate the structure.

[MTVacation]

Thanks Carl.  When I look at our old returns (completed by a CPA) each year of the Schedule E includes number of days rented and number of days personal use.  2006 through 2012 the expenses and depreciation were prorated accordingly.  From 2013 until present there were no personal days so the depreciation was the same $5500 every year.  There was no new basis or in service date established.  We just simply stopped using the property for personal use.  So there is something that 3 CPAs were able to enter in their software that I'm not finding in TurboTax to continue forward with the current depreciation worksheet instead of somehow creating a new worksheet starting 10-12 years ago.  It is true that if I enter a 2011 in service date in TurboTax it will calculate $5500 accordingly.  Seems like doing something like that would require a 3115 to change what none of our accountants ever thought was broken.

[Carl]

There was no new basis or in service date established. We just simply stopped using the property for personal use.

The program is not capable of dealing with changes in business use percentage year to year. If 2022 was 100% business use, then the program assumes every year back to the date placed in service, was also 100% business use, and assumes it was depreciated in those prior years accordingly.

If the total of all prior year's depreciation does not amount to 100% business use for all of those prior years, then the program will account for that in the current tax year by taking a "catch up" depreciation amount for the current tax year, so that it does account for 100% business use in all prior years back to the in service date.

Now with the desktop version of the program you can go into forms mode. (Not possible with the online version). In Forms mode you can over-ride the program and enter all your figures manually. However, you will not be able to e-file the return. You will have to print, sign and mail the return to the IRS, as well as to the state if your state taxes personal income.

Two things happen when you use forms mode and enter an over-ride figure.

1. You will not be able to e-file the return. You'll have to print, sign and mail it.

2. The TurboTax 100% Accuracy Guarantee becomes null and void automatically when you do an over-ride.

Your other options are:

A. Starting with the first year the property became 100% business use, establish a new cost basis as outlined above and use that adjusted cost basis to begin/account for depreciation in the first year the property became 100% rental use. The program will automatically figure the prior depreciation back to that first year of 100% rental use.

B. Don't use TurboTax, and continue to utilize the services of a local CPA, EA or other tax professional in your local area.

[MTVacation]

Perfect Carl!  Now we are on the same page.  I banged around in forms for hours before posting my question.  How would I proceed in forms to manually enter the depreciation?  All cells seem locked or result in a carry-over that TurboTax immediately tries to recapture. Thanks again.

[Carl]

It's perfectly -possible that even in forms mode, when you enter a figure in one field, it changes things in other fields making the overall return incorrect still. I myself have never used forms mode, because I've never needed to. I would strongly suspect that unless you do as I advise and establish an adjusted cost basis from the first year the property became 100% rental use, that you just flat out will not be able to use the TurboTax program at all for this.

[sandra88]

I'm facing the same issue - it's 2025.  Hope I can learn from your experience!

[sandra88]

Carl - Thanks for the heads-up.  I'm 2 years late to the post, but I almost have the same issues with short rentals for a few years (2002-2004), personal use 100% (2005-2016), then resume rental (2017 - 2024) varying ~85.85% rental!  Would you suggest I apply all the depreciation up to 2024, and start 2025 with the new cost basis and 100% rental depreciation since we won't be using any personal days?

Actually we've been at 100% rental use every year since 2020, but the new CPA manager continued to use the same 85.85% rental use percentage from 2019 :(

Carl - Also, I think you might have mentioned in some other post that we should NOT enter the Prior Depreciation from the TurboTax prompts? 

I did try to put the in-service date back to 2002 when we first started part-time rental, then enter the Prior Depreciation per the CPA record, set the Business Use to ~35 percent for the whole period and got the proper annual depreciation!  BUT that's a No-No, right?

[PatriciaV]

If TurboTax calculates the same amount for Prior Depreciation that you have per your records, there's no reason to override the number presented by the software. If the business use percentage has changed, enter that percentage for the current tax year. TurboTax will calculate the appropriate depreciation based on the information you provided.

Basically, you are entering the adjusted basis and accumulated depreciation to arrive at the depreciable basis. Current depreciation is based on that number - the property history is irrelevant because you know the depreciable basis.