RiversideCPA wrote:Joan I believe you are right, a new 27.5 year period would start over.
In year 11, cost of 100,000 would be reported on 4797 as well as the depreciation allowed in both periods.
The consensus was to start a new depreciation over 27.5 years for the second rental period because for depreciation purpose it is considered as a disposition. The following 2 points were not specifically said in the thread, and I would like to seek confirmation and solution for the issue.
(a) The prior year depreciation should be adjusted to include the first rental period. This is for the convenience of finding the the accumulated depreciation in the event of the final sale so that we do not need to go back to the tax returns of prior years. The prior year depreciation, unlike not allowed rental loss, does not appear in any form but the depreciation worksheet, is this part of the IRS record or just a record of the preparer? I think it is part of our record only because if we were to paper file, we do not submit the worksheet.
(b) The depreciation basis is still the lower of cost basis (adjusted by depreciation) or the market value. The problem of using the the market value when it is lower is that upon the final sale, we have to re-compute the cost basis, while if we use the cost basis, then everything we need is reflected in the depreciation worksheet.