Question about home improvement after half year renting of my house

[wleuter]

I rented my house for the first half year, after that I used it personally and made some home improvements. Let's say next year I will rent it again, will these home improvements bring any tax benefits/deduction for this year or next year?

I saw that TurboTax asked some home improvements which happened before the renting but my situation is different.

[tagteam]

it's not exactly clear as to how you are handling this scenario nor what you are renting (the entire house or a part of the house) but if you continue to place your house into service and then take it out of service, you will have to continue adjusting your basis each time.

You would reduce your basis for depreciation deductions taken (or should have been taken) and increase your basis for the cost of improvements made.

[wleuter]

@tagteam 

Thanks for your answer.

Let's say I rented my whole house from Jan to Jun in 2022, then I moved back to my house and did some home improvements, then I rented it again from Jan to jun in 2023.

Can I use these home improvements to do depreciation for 2022? (But they happened after I rented my house in 2022)

Or should I use them for 2023?

Thanks again.

[tagteam]

Yes, you can add the cost of the improvements to your basis for depreciation when you rent the house in 2023.

However, you need to reduce your basis for depreciation by the depreciation deduction you took when you rented the house in 2022.

[wleuter]

@tagteam 

Thank you very much!

So even the improvements happened in 2022, I can still add the cost of the improvements to my basis for depreciation? That is great!

I don't understand why I need to reduce my basis for depreciation for 2022? Let's say I didn't use them improvements for my tax deduction in 2022 at all because they happened after my renting was over in 2022.

[wleuter]

@tagteam 

Can you take a look at my follow up question when you get a chance?

Thank you very much!

[tagteam]

Because you took the property out of service as a rental, when you place it back into service your basis is lowered by the amount of depreciation previously taken (or should have been taken).

[Opus 17]

If you take the property out of service as a rental, and then place it back in service, I believe you restart the depreciation clock at 27.5 years, with a new basis.  You don't resume the old depreciation schedule or old basis.

Your new depreciation schedule is based on either:

a. your adjusted cost basis, or

b. the fair market value, whichever is lower,

And you subtract the cost of the land.

Your adjusted cost basis when you put the home back in service will be the price you paid, plus improvements you made, minus the prior depreciation.  

So you can get "credit" for the recent improvements because they increase your basis, but you will deduct them over 27.5 years as part of the overall property depreciation. 

[tagteam]

One other issue, @wleuter, is whether you are renting your house for part of the year, every year (or plan to do so). 

If that's the case, your rental starts looking more like it's subject to the vacation home rental rules (not that it is actually a "vacation home", so don't let that title mislead you), particularly Section 280A(d)(4).

See https://www.law.cornell.edu/uscode/text/26/280A