Rental property depreciation cost update needed if portion of house that is rented changes?

[vinodr777]

For the past 4 years I have rented my home while also living in it. The portion of it that was rented is 2/3. When I initially filled out the depreciation portion for the property itself I multiplied the house cost by 2/3 and the land cost by 2/3 in the depreciation section. I did not change those values for the next couple of years until end of 2020 because my property was 2/3 rental until then.

Right from the beginning (hope this makes it a bit easier) of 2021, I started to only rent out 1/3 of my house until August 2021 when it no longer became a rental and I moved in as primary residence.

I was able to update all other things like rental expenses, mortgage interest, etc to reflect the new rental proportion. But I am unsure of how to update the property depreciation or if I should? From what I've heard in general, the depreciation cost information should not be updated. For example, should I now update the house cost to be 1/3 times the original cost of house and land to be 1/3 times the original value of land when I originally bought the house? Or do I need to completely add a new rental property for the 2021 year, and if I do that should I update anything in 2021 for the old unit from 2020?

@Carl I saw you answer a lot of these questions from browsing the discussion board so I think the answer is the latter, but could really use your insight in this particular case where the amount of rental percentage is going less vs up. Thank you!

[LeonardS]

No, you do not need to add another rental for 2021.  You may continue to deduct the income, expenses, and depreciation for the rental period in 2021 without having to adjust the area rented.  You will keep the total depreciation taken in your tax records.  This will be needed when you sell your home the depreciation will be used to adjust the basis of the property when calculating the capital gain on the sale.

[vinodr777]

Thanks for your response @LeonardS . But I just wanted to double check if this is accurate because it seems like I would be using more of the depreciation (2/3 base cost) versus the 1/3 of house that is actually rented out this year? Can you explain why it is ok to keep depreciation the same this year, if I am renting out less of the home?

The response is slightly different from what I have seen in posts like this one from @Carl 

Though those are going in opposite direction where there is more of the property being rented.

[LeonardS · Accepted solution]

If the entire 2/3 of the house was available to rent you do not need to make any adjustment.  You would only need to make an adjustment if it was your intent to continue renting and changed the asset from 2/3 to 1/3. 

@vinodr777

[vinodr777]

Ah I see I didn't realize it was based on availability instead of what is actually being rented.

Yes in that case, there was 2/3 of the house available to rent. Though I only was able to rent 1/3 of it until August at which point it stopped being a rental altogether and I made it my primary residence.

Thanks for clarifying this @LeonardS . Does that mean that also for other rental expenses like mortgage interest, I also keep the ratio applied at 2/3 (instead of 1/3) for the portion of the year until August?  

[KrisD15]

Yes.

Those expenses would still be allowed and they do not need to be "recaptured" ever, unlike Depreciation which might need to be recaptured when the property is sold. 

[Carl]

What is rented and what is "available" to rent are two different things. If what is/was "available" to rent did not change, then nothing what-so-ever changes on your SCH E.