Depreciation for a property used as a rental and a home in different years

[15Gornzz51]

The taxpayer used their home as follows:
1] Purchased their residence in 2002.
2] Rented it from 2005-2016.
3] Used it as a residence from 2017-2022.
4] Rented it starting Feb 2023.

Should the depreciation schedule from 2005-2016 be continued with the purchase price and land value from 2002)?

Or should a new depreciation schedule be started from Feb 2023, using the lower of the 2002 purchase price & land value or the current FMV and current land value?

Should the previously taken depreciation be used as the prior year depreciation for the 2023 return?

[rbynaker]

I've seen different answers on this. There's nothing exactly on-point in the regs but they do say when you convert from personal use you depreciate lower of adjusted basis or FMV. My approach has always been (using your example):

1) Allocate purchase price between land & building in 2002 (usually based on %age of assessment at that time)
2) Place in service in 2005 at lower of cost or FMV (usually cost)
2.5) Be sure to adjust basis for 2002-2005 improvements if applicable
3) Stop depreciation in 2016 and remove from service. I print (or print-to-PDF) a copy of the "final" depreciation schedule since that will be needed in the 1250 gain calculation later
4) Place in service in 2023 using the lower of FMV or adjusted basis (cost + improvements - depreciation from "old" depreciation schedule + any new improvements), restarting the 27.5 year clock.

There are plenty of other folks who say you just continue on the original 27.5 year schedule, I've found no support for that approach but it does make some sense. Tax laws don't have to make sense though.

If/when they sell I'll manually adjust the original cost & accumulated depreciation so we get the right tax result in the year of sale.

For added fun, throw in some suspended PALs from the early year mixed with some new ones from later years. And bonus points if this rises to the level of a trade or business and you have QBI losses from various years. Be sure to charge accordingly.

Rick

[TaxGuyBill]

I agree with Rick.

Regulation ?1.168(i)-4(c) says that converting to personal use is treated as a Disposition for depreciation purposes (but no gain or loss calculated). That means when it is converted to business use again, it is "placed in service" as if for the first time (for depreciation purposes).