foreign residential rental propery -- depreciation and basis

[jvgsr]

I emigrated from China to the U.S. and became a U.S. taxpayer in 2020.  Before becoming a U.S. taxpayer in 2020, I bought a residential property in China for $100,000 in 2010, lived in it until 2015 and and then rented it out from 2015 to the present.  How should I claim depreciation?  For every year from when I started to rent it out in 2015 OR for only for the years since since I became a U.S. taxpayer in 2020?  What is my basis for U.S. tax purposes?  The price I paid for it in 2010 plus improvements made when rented out OR its value in 2020, when I became a U.S. taxpayer, which had increased to about $500,000?

[DaveF1006]

No. You can claim depreciation on rental property from the time you first started renting out your property. Your basis would be the price you paid for it in 2010 plus improvements made.

[pk]

@jvgsr  whereas  I do agree with the strict ( and correct )  interpretation  as  suggested by my colleague @DaveF1006 ,  it is still  really unfair  in  fact.    This is because , even though ,  

(a) conversion of home  to rental/income does allow you to choose  FMV or actual cost  ( acquisition cost plus cost of improvements ) as basis  -- which ever is lower.

(b)  For depreciation you can choose the old 40yr life for  foreign residential  property  ( converted prior to 2018 )  it still leaves you with possibly a large  un-recognized   & accumulated depreciation burden  lowering your adjusted basis  ( when you dispose off the asset )  and for which you had zero benefit under US tax laws.

(c) No way to recognize any suspended losses  ( if there were any )

I do not have any solution for this issue  but do sympathize with your predicament. 

Just a commentary .

Is there anything more one of us can do for you ?

[jvgsr]

pk and DaveF1006 -- Many thanks for your responses!  I have a couple follow-up questions:

(1)  If I understand correctly, I can claim depreciation starting from when the foreign residential property was converted to rental use in 2015 even though I did not become a U.S. taxpayer until 2020.  How do I claim depreciation for 2015-2019?

(2)  I have seen differences of opinion of tax experts about whether the depreciation period for foreign residential rental property put in service before 2018 should be 30 years or 40 years.  Has this been clearly settled?

[DianeW777]

The depreciation can be captured and used in your current year tax return using Form 3115 which must be filed with your 2024 tax return. Follow the instructions in the link below. 

Next, for the prior depreciation you have not used.  At the point of sale, you will recapture any depreciation that was allowed or allowable. 

• You can use the following form to correct the depreciation for your property. Take any amount not previously expensed on prior returns, as an expense on the current year tax return as 'Other Expenses'.

Form 3115 Instruction: By including this with the current year tax return, you can complete everything on the 2024 tax return.

• Adopt a change in accounting method: This option allows you to go back as far as you need. Make the adjustment on your current year tax return to expense the missing depreciation.
  • Why am I adopting a change in accounting method? Not claiming depreciation in two or more years indicates that you've chosen an accounting method without depreciation. In this case, you must now elect to change your accounting method to include depreciation.
• This form is available in both TurboTax Online and TurboTax Desktop. TurboTax doesn't help you with this form. And your return must be mailed because this form is not supported through e-file.

Your property in a foreign country is depreciated over a 30-year or 40-year period, depending on when it was first placed in service for rental use. Instead of the 27.5 year for US residential properties the period is different.  

• Prior to 2018, depreciation of foreign residential property was limited to 40-year period.   
• 2018 and Future: New assets placed in service now get the lower 30 year period.

@jvgsr