This seems to be my year for complicated house-related transactions. Here's the latest... Home purchased in 2004 as residence. Converted to rental in 2009 for two years. Converted back to residence in 2011 and then converted back to rental in 2014. Purchase price in 2004 was higher than FMV at the time of the conversion to rental in 2009 so the basis used for depreciation was the FMV (building portion). Depreciation accumulated for about 20 months and then stopped upon conversion to residence. Since then, the FMV has climbed and is now back above purchase price. What's the basis for depreciation that starts in 2014? Does it remain on the same depreciation schedule as in 2009-2011, just continuing from there? Or, do we have a new 27.5 year SL deprecation schedule using the purchase price (building portion) minus accumulated depreciation thus far?
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That certainly is an interesting situation!
When the property was converted back to the owner's residence in 2011, it ceased being rental property and so did the accumulation of depreciation. When it was converted to a rental for the second time, in 2014, the same rules would apply as they did in 2009. The second time, however, the FMV upon conversion was equal to or higher than cost basis, so the basis for depreciation (and calculation of gain or loss) is the same as cost basis, minus the 20-months of depreciation taken between 2009 and 2011. Using that as the property's adjusted basis, start depreciating it again over a new 27.5-year life.
If there is a gain when the property is eventually sold, all the depreciation taken ... from 2009 to 2011 as well as from 2014 forward ... will be characterized as Unrecaptured Sec 1250 Gain. That means that the "old" depreciation must be tracked and not lost or ignored.Roland Slugg
"I do what I can." -
That makes perfect sense and is the way I've started to do it while waiting for a response from an intelligent individual like you
Glad to know I was on the right track. And thank you for your response!
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