Impact on depreciation schedule/amounts if I change rental portion from 20% to 100% during a year.

[attc_23]

I am currently renting out a portion of a condo unit (20%) and living in the remaining portion. The date of service began on 1 Jan 2023 and the rental portion was available for rent the entire year. I plan to utilize a pro-rated proportion (20%) of the full depreciation amount for the initial tax year claim, but expect to make the entire property 100% a rental unit during tax year 2024 after moving out of it. How does this change affect the past or current depreciation schedule/amounts, if at all? What is the correct method to determine the percentage during a year split between 20% and 100% usage (e.g. a weighted average over time?), and is it acceptable to simply claim the adjusted proportion on subsequent returns or does this require a request to change accounting method in any way, or amend prior returns to adjust the depreciation? Since this would result in less than the entire property being depreciated at the end of the 30 year (ADS) period, I have some doubts this is correct.

[tagteam]

The adjustment is in the percentage of rental use (TurboTax does not handle varying business use well).

Regardless, why are you using ADS?

[Critter-3]

Ok ... best course of action will be to continue depreciating the 20% as is  then add an asset for the other 80% of the property ... this is easy to do and keeps the most accurate record for future needs in case you move back in later. 

This is just like if you owned a duplex and rented one side and lived in the other.  If you move out then you would have 2 assets listed with different depreciation start dates.  

[Mike9241]

The way I would handle this for 2023 is to enter 20% of the cost and set the business use at 100% you'll only get 11.5 months of depreciation for 2023 under the tax rules - mid-month convention. This continues as long as the property is rented. Then the date you start renting 100% you enter the other 80% as another asset again with 100% business use with an in-service date based on the date you put it out to rent. This should keep the Asset Life History correct

the other way is to enter 100% of the cost but 20% business use for 2023

for 2024 you'll have to manually compute the business use %

something like -  days 20% rented/365 + days 100% rented (based on the date you put the other 80% out to rent)/365

then in 2025 assuming 100% rented you change the business use to 100%.  the problem with this approach is that the Asset Depreciation History will assume the asset was always 100% rented from 1/1/2023 and thus the accumulated depreciation in the worksheet will be wrong.

there is a trick in Turbotax that you must use to be able to use ADS depreciation rather than standard MACRS

type of asset must be other type O

depreciation method ALT

[attc_23]

Thank you all for the guidance--very helpful and much appreciated.

[attc_23]

After further review, I may be mistaken about the ADS schedule. I would say there is nothing particularly special or odd about the rental scenario (e.g. an electing real property trade or business). My initial read on IRS p946 p.27 was that listed property utilized less than 50% for business use must use the ADS schedule.  However, I now see that "listed property" has a specific meaning that doesn't look to include this kind of rental property. Further, if I utilize 20% of the cost at 100% business use, it would no longer fall under that category anyway. So I believe GDS is the correct path here instead.

https://www.irs.gov/pub/irs-pdf/p946.pdf

[Critter-3]

Agreed ... enter them as 2 separate assets and the program will handle it just fine with no manipulation needed.  When asked if there was any personal use days ONCE THE RENTAL BEGAN your answer is always ZERO personal days (read the entire line/fine print).