Depreciation when converting a 27year old house to investment property

[mev0]

I have a house that I purchased 27 years ago and I am converting it from a personal residence to a rental property. When doing the cost basis and trying to get some depreciation benefit it appears that TurboTax is using the original purchase date to calculate depreciation thereby providing very little depreciation value because the house has almost reached the 27.5 years since I've owned it. Does this really mean that I will no longer be able to get any depreciation deductions after next year?

It was refinanced and full ownership was taken over due to a divorce, but from what I've read that does not necessarily restart the depreciation clock because it was not a purchased,  but it's considered a transfer or buyout.

Can you please provide some clarity?

Thanks in advance.

[VictoriaD75]

The basis for depreciation will be the lesser of your original cost plus any capital improvements during ownership or the fair market value on the date of conversion. Given the length of time that the home was a personal residence, I am assuming that your original basis (plus the cost of capital improvements) is less than the current market value. That will be your depreciable basis. Remember to remove the value of the land, as land is not a depreciable asset.

Residential real estate is depreciable over 27.5 years. Per the IRS:

Conversion to business use. If you place property in service in a personal activity, you can’t claim depreciation. However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. You place the property in service for business or income-producing use on the date of the change.
 

Example. You bought a house and used it as your personal home several years before you converted it to rental property. Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income.

Therefore, there is not much depreciation left on the property if you have already lived in the home for 27 years.

IRS Publication 527

@mev0 

[Opus 17 · Accepted solution]

No matter how long you owned the property or how old the structure is, rental depreciation starts with the full 27.5 years when you convert it from personal to a rental.  If you are seeing something different, you are either misunderstanding what you are seeing, or you are doing something wrong when listing the property as business property.  If you can't figure it out here, you may need to call customer support.

Separately, the basis for depreciation is either your cost basis or the fair market value on the date of conversion, whichever is lower.  Your cost basis is what you originally paid, plus the cost of any permanent improvements you made.  So if you bought for $100,000, remodeled the kitchen for $20,000, then your basis for depreciation is $120,000, even if the market value is much higher after all this time.  --- And actually your basis is less, because you can't depreciate the part of the cost that is from the land, since land doesn't depreciate.  

[mev0]

Thanks for the simple explanation

[mev0]

Thank you, this was very useful.