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Interesting set of facts and circumstances that I'd be interested to hear opinions or real life experiences on regarding residential real estate rental property:
Taxpayer owns a home that was their primary residence for eight years. After 8 years, taxpayer moved away and was unable to sell the house, and subsequently placed it in service as a rental property. Fast forward five years - taxpayer stops renting the property and moves back in to it as their primary residence. After three years, the taxpayer moves out again and resumes renting the property indefinitely. None of the depreciation is 1250 depreciation.
1. When the taxpayer begins to rent again, do they resume claiming depreciation based on the previous schedule as if nothing happened (after capitalizing any improvements and adding those to the adjusted basis)? Would this pick up at the 22 1/2 year mark or would they restart at 27 1/2 years?
2. Would they realize and recognize 5 years worth of depreciation recapture in the year they put the property back in service as a rental, and start over at 27 1/2 years with a new adjusted basis that did not include the prior 5 years depreciation?
3. If neither of these two scenarios are correct, how would the 1st five years of accumulated depreciation be treated for tax purposes and what would the adjusted basis of the property look like when the property was treated as a rental for the second time?
Appreciate any thoughts or experiences with this. I realize it is a very unusual set of facts but I'm sure it has happened before?
Are you over the 15% tax bracket? If not, it's a moot point. Long term capital gain tax rate is 0%.
Assuming an eventual sale, the rate on the recapture amount would be 25% regardless of tax bracket, unless the taxpayer sold at a loss that equaled or exceeded the total amount of depreciation taken or available. In a gain situation, any amount over the recapture would than be treated as LT capital gain and taxed according to the taxpayers tax bracket. This scenario is assuming there is no sale of the property, or isn't considering that.
The question here, however, is regarding the treatment of depreciation assuming no sale and a period in between when the property is being used as a primary residence and is not eligible for depreciation.
The conversion of the property back to personal use is treated as a disposition of the property (no gain or loss is recognized, but the characteristics of recapture are calculated at that time and preserved until sale).
It's not specifically stated but since that transaction is treated as a disposition, the property would be considered new property such that a conversion back to rental use would be newly placed in service. You take the lower of the adjusted basis (including the previously deducted depreciation) or fair market value at the time of conversion and depreciate over a new 27.5 year period.
The conversion of the property back to personal use is treated as a disposition of the property (no gain or loss is recognized, but the characteristics of recapture are calculated at that time and preserved until sale).
It's not specifically stated but since that transaction is treated as a disposition, the property would be considered new property such that a conversion back to rental use would be newly placed in service. You take the lower of the adjusted basis (including the previously deducted depreciation) or fair market value at the time of conversion and depreciate over a new 27.5 year period.
Interesting. Since the initial depreciation would reduce the adjusted basis in the property I assume there would be no reason to separately track it once the property is placed back into service as a rental.
Interesting. Since the initial depreciation would reduce the adjusted basis in the property I assume there would be no reason to separately track it once the property is placed back into service as a rental.
I think you still need to keep a record of that information as it's still subject to recapture upon ultimate disposition of the property.
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