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Residential Rental property be taken in and out of service?

Technical topics regarding tax preparation.
#1
MikeH  
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Client has a small home, on a separate lot, next door. It's been rented for 7 years. Client has stopped renting, now mom is moving in. When mom goes to a rest home, client plans to rent it again. Can I take it out of service, then re-start it? Or, do I continue the Sch. E with no activity? Or?

Thanks,
Mike Hartfield
Mike Hartfield, CPA
Canyon Country, California
Office: 661/309-4681 Cell: 818/433-5359
 

#2
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See 280A. Do a deep dive on that code section and the related regs in your free time.

But in a nutshell, I think you have a change in use. The property is removed from service, and the home is treated as a second home of the child.
 

#3
JAD  
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Agree. It has been converted to personal use property. Restart depreciation when it returns to being a rental.
 

#4
Nilodop  
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Let's say adjusted basis just before it's converted to personal (Mom's) use is 200k and FMV at that point is 150k. (Yeah, it's CA so not likely but play along). What's basis if the property is sold before it's returned to rental use?

Now let's change facts. Opening sentence stays the same. But a few years later Mom goes to retirement home. Property is back to FMV of 200k and is a rental again. What is basis as a rental?
 

#5
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I believe that when you take a rental property out of service its a disposition, and when it is place back in service the depreciation should be restarted at 27.5 years, and also be subject to the lower of cost basis or FMV test.

I have never seen specific guidance on the subject, the regs that deal with it - 1.168(i)-4 do not specifically cover former business property converted to personal use and then converted back to business, but I believe the plain language of 1.168(i)-4(b) which states that:

upon a conversion to business or income-producing use, the depreciation allowance for the year of change and any subsequent taxable year is determined as though the property is placed in service by the taxpayer on the date on which the conversion occurs.....The depreciable basis of the property for the year of change is the lesser of its fair market value or its adjusted depreciable basis (as defined in § 1.168(b)-1T(a)(4))


https://www.law.cornell.edu/cfr/text/26/1.168(i)-4

Suggests that the recovery period should start when the property is placed into service, and subjects the depreciable basis to a second test which would not be met if a previous depreciable period was resumed.

I would be happy to be corrected on this, if anyone has a source.
 

#6
Joanmcq  
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I believe Regs 1.168 has to do with the value you start to depreciate it at when converted to a business property, ie. if it drops in value that is what it is depreciated at, not basis. I've always, when a property is converted to biz use, then goes back to personal, then biz again, just keep a depreciation schedule and start again where you left off. No new 27.5 years.
 

#7
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Joanmcq wrote:I believe Regs 1.168 has to do with the value you start to depreciate it at when converted to a business property, ie. if it drops in value that is what it is depreciated at, not basis. I've always, when a property is converted to biz use, then goes back to personal, then biz again, just keep a depreciation schedule and start again where you left off. No new 27.5 years.


Do you have any sources for that opinion? I haven't seen anything specific to "re" conversions.

I would also like to point out that section c of that reg states:

The conversion of MACRS property from business or income-producing use to personal use during a taxable year is treated as a disposition of the property in that taxable year.


So in my thinking we have a series of conversions / dispositions each one is complete and final, I have not found any support resuming depreciation after the disposition.
 


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