Need Help With Depreciation

[Kram BergGold]

Client converted rental apartment into home office. I know I am to take adjusted basis of the property and depreciate it over the longer life. But I can't figure out how to do this.
Here are some numbers. Rental began on 10/15/87, SL, 27.5 yrs. Basis $30,000, depreciation claimed $20,000. So adjusted basis is $10,000. Now what?

[Snaggletooth]

Our Hahvard Friend

Kram, an easy answer is simply to continue on the same methodology as has existed.
I believe if no conversion costs were incurred, this is the preferred answer, but PLEASE, someone correct me if I'm wrong. Looks like when this started, today's MACRS costs were not in effect. IRS has never required a change in life or convention if the law changes in a subsequent year.

However, if there were conversion costs, I believe the remaining basis should be commingled with these new costs, and then depreciated under current OIH life and method.

Would like to hear from others. I've spoken as if I know a lot about this, and fact of the matter, I've been humbled a number of times.

[OldJack]

The taxpayer was the owner of the property when it was deducted as rental property and the taxpayer is the owner now that it is being used as an office. There has not been a disposition as far as the taxpayer is concerned so there would be no change in the depreciation schedule. The depreciation continues with the only change being where the depreciation is deducted on the tax return.

[jainen]

almost a year

>>there would be no change in the depreciation schedule<<

It's been almost a year but I'm still bound by the pledge I made to Black Bart not to insult other people. Therefore I will describe this creative opinion as refreshing. Dead wrong, but a lot of clients don't care about that anyway.

[Gene V]

Client converted rental apartment into home office. I know I am to take adjusted basis of the property and depreciate it over the longer life. But I can't figure out how to do this.
Here are some numbers. Rental began on 10/15/87, SL, 27.5 yrs. Basis $30,000, depreciation claimed $20,000. So adjusted basis is $10,000. Now what?

If I read this right, you are turning your rental property back to a resident with a home office. Then I would start an new depreciation using $10,000 with 31.5years life

[jainen]

the next 19 years

>>start an new depreciation using $10,000 with 31.5years life<<

To determine the recovery period, subtract the 20 years already taken from the 39 currently required. If your software can't handle it, you'll have to calculate by hand and do a computer override for the next 19 years.

[gkaiseril]

Conversion

The asset is being converted from residential real estate to non-residential business use. This conversion now requires a different depiction period be used for the asset's adjusted basis. You will have document the change and keep track of the original cost of the asset and the prior years deprecation allowed or allowable, as this will need to be recovered when the asset is sold.

[Gene V]

Your right its 39 years, property place in service after May 12, 1993.

[OldJack]

>>there would be no change in the depreciation schedule<<

It's been almost a year but I'm still bound by the pledge I made to Black Bart not to insult other people. Therefore I will describe this creative opinion as refreshing. Dead wrong, but a lot of clients don't care about that anyway.

Well... I don't hold you to the promise jainen. Fire away.

It appears that maybe both of us are correct. I could not find this covered in TTB, but it is covered in the 2005 Quickfinder Depreciation Handbook, page 2-11 and 2-12. The example quoted there was an apartment building depreciated at 27.5 years converted to an office building at 39 year recovery period.

One sentence at the beginning on page 2-11 says "A change in how a taxpayer uses an asset can result in a different recover period, a different deprecation method, or both."

It goes on discussing the issue and on page 2-12, says "The taxpayer also has the option of continuing to calculate depreciation as though the change in use had not occurred. The taxpayer elects this treatment by calculating depreciation (on the timely filed, including extensions, federal income tax return for the year of change) as though the change had not occurred".

The subject continues with "Strategy: If an asset is near the end of its recovery period, ignoring the change in use may be advantageous, since the remaining basis will be written off over the remainder of the original recovery period, which may be shorter than the new recovery period."

what say ye.

[jainen]

it is wrong

>>"The taxpayer also has the option of continuing to calculate depreciation as though the change in use had not occurred.<<

Rats! I was hoping I could slide that one through. Yes, I admit the tp does have an option to ignore the change in SOME cases. Not this one, though. The option is only available if the new recovery period is shorter than the old one, such as going from commercial to residential.

So it's not dead wrong, but it is wrong.

[OldJack]

>>"The taxpayer also has the option of continuing to calculate depreciation as though the change in use had not occurred.<<

Rats! I was hoping I could slide that one through. Yes, I admit the tp does have an option to ignore the change in SOME cases. Not this one, though. The option is only available if the new recovery period is shorter than the old one, such as going from commercial to residential.

So it's not dead wrong, but it is wrong.

Rats! I overlooked that little sentence. Since this is a conversion from 27.5 to 39 years the adjusted basis is depreciated over the 39 years less the number of years it was depreciated as the 27.5 years property. I think we both missed that in our original posts. I was wrong and as a result the original poster has a better answer due to everyone disagreeing with me.

[jainen]

the very thing

>>the original poster has a better answer due to everyone disagreeing with me<<

Why, that's the very thing I myself try for every day!

[OldJack]

>>the original poster has a better answer due to everyone disagreeing with me<<

Why, that's the very thing I myself try for every day!

D.a.m.n! Now you have gone and done it giving me some credit instead of an insult. I expected you to say it had nothing to do with me and it was because you and everyone stuck to your guns and gave the correct answer. Jainen, you really are getting soft in your old age.

[jainen]

my next post

>>you and everyone stuck to your guns and gave the correct answer<<

If I gave the correct answer, I apologize. I will try to be more controversial in my next post.

[Kram BergGold]

Thanks Jainen

Your answer makes sense and I think you are right it is going to take some finese to get the computer to do a 20 year life but I think I know how to do it.