residential rental multiple rental periods

Technical topics regarding tax preparation.
#1
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Hello,

TP bought a home, lived in it, moved out and rented if for a period, moved back in, moved out and rented it again, then sold it.

Prior tax preparer used original purchase price as depreciable basis for first rental period. For the second rental period he reduced the depreciable basis by the depreciation taken during the first period.

I would have used the same depreciable basis for both rental periods. My thinking is that reducing the basis for the second period prevents you from taking advantage of all allowable depreciation during the second period, even though when sold the entire amount of allowable depreciation must be recaptured.

Who is right?

xtntg
 

#2
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I would take a look at Reg 1.168(i)-4 which provides rules for change in use

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)), as applicable, at the time of the conversion to business or income-producing use.

It would appear resetting the basis and starting depreciation over again is appropriate.
 

#3
Coddington  
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That regulation goes even further. The first conversion back to personal use is treated as a disposition event, but no gain or loss is recognized. Any section 1245 or section 1250 (un)recapture taint remains.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#4
makbo  
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xnewtaxguy wrote:I would have used the same depreciable basis for both rental periods.


You mean, you would use unadjusted basis the second time?

xnewtaxguy wrote:My thinking is that reducing the basis for the second period prevents you from taking advantage of all allowable depreciation during the second period


I don't follow. Could you illustrate with a simple numerical example?
 

#5
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OK Here's an example:

* Client buys property for $100,000
* Lives in property for 2 years. Makes no improvements
* Rents it out starting for three years, starting in year 3. Depreciable basis = purchase price $100,000 (Ignoring land value for this example); Depreciation taken over three years: $9,000
* Client resumes living in property in year 6. Makes no improvements
* Clients moves out again, starts renting property in year 9 until property sold at end of year 11.

So that's where my questions arise:
* assuming property has increased in value to $130,000, what is depreciable basis for 2nd rental period?
Is it $100,000 less depreciation taken in first rental period = $91,000?
Is it original purchase price, $100,000?
Is it year 9 FMV $130,000?

Also, when should depreciation from first rental period be recaptured?
When property reverts to personal use in year 6?
Upon sale in year 11?

What happens if client was supposed to recapture depreciation after first rental period but didn't?

My original point is/was that if during second rental period if depreciable basis is lower than it was, the appropriate (allowable) depreciation (from the original, higher basis) would not be taken.

xtntg
 

#6
Coddington  
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From Justin's post, you should see that the depreciable basis for the 2nd rental period is the lower of the adjusted basis or FMV. Thus the depreciable basis would be $91,000. From my earlier post, you should see that the unrecaptured section 1250 gain comes into play in upon the ultimate sale in year 11.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#7
Joanmcq  
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I've always thought the clock stopped during conversions and reconversions. In other words, would you start a new 27.5 year period at $91000 basis, or continue on with the old period?
 

#8
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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.
 

#9
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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.
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 


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