Bonus/Special Depreciation on Rental Property

Forum|Forum|3 years ago
February 3, 2023
2 replies
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Hi,

I converted a single family residence to a rental property in 2022. I had a cost segregation study done and have separated out 5, 15, and 27.5 year depreciable items. I would like to take 100% bonus depreciation on the 5 and 15 year items. Under the asset section of Turbotax Premiere (online), I enter each (5, 15, and 27.5 year) separately and check the "special depreciation" box for the 5 and 15 year. However, after getting everything in and hitting continue, it doesn't seem to register. The 27.5 year items keep disappearing every time I log in; and while the 5 and 15 year items remain, the special depreciation doesn't change the taxable income listed, which should be very negative.

Am I going about this correctly? How do I get the bonus/special depreciation to work?

TurboTax Premier Online

Carl11_2

Employee

In the assets/depreciation section, enter the property itself first. Work it through and it'll set things up based on your selections, for the 27.5 year depreciation. When you're done with that entry, leave it alone. You'll see it listed when you return to the assets/depreciation list upon completing the entry. Then click the "Add Another Asset" button and press on with your next asset. Understand that anything you classify per MACRS as "residential rental real estate" will be depreciated over 27.5 years, and SEC179 and SDA is not an option.

Typically, 5 year property are things like appliances, and 15 year property are things like land improvements; such as a retaining wall. Things classified under MACRS as appliances while depreciated over 5 years, should give you the option of selecting accelerated depreciation, such as the SDA. I'm not sure about 15 year assets.

Just be aware that most likely, all this work to separate things out is not going to have any impact on your tax liability anyway, since long term residential rental real estate with a mortgage on it is practically guaranteed to operate at a loss anyway.

Helpless4Author

Hi @Carl11_2 ,

Thanks for the reply. I deleted all asset information and restarted by first adding the "27.5 year structure" (total cost minus the cost of segregated 5 and 15 year items). I then went back in and added the 5 and 15 year items, as furnishings, appliances, etc., and land improvements. These do show as depreciable over 5 and 15 years in TurboTax, as desired, and allow special depreciation to be selected. Picture below shows the summary.

What confuses me is that fact that this doesn't seem to count against my taxable income. My other property, that I've had for a few years (straight line depreciation, no bonus or segregation) shows up as a net negative (loss) because of the depreciation, and thus reduces my total taxable income (W2 and other investments included), and results in a larger tax return.

I'm not seeing that with this property. Rather than showing as negative, it just shows zero, not allowing me to take full advantage of the depreciation. Perhaps I am mistaken, but all of the research I have done led me to believe that the bonus depreciation would cause the property to show up as a large loss on my return and result in a much smaller taxable income, which can then be reinvested. Am I misunderstanding?

Anonymous_

Employee

@Helpless4

What you are seeing is your property asset summary in the interview section of the program.

Check your Schedule E and/or your Schedule E Worksheet.

Note that your net loss is going to be limited since losses from residential real estate are passive. You may (probably do) qualify for the special allowance for active participation (see link below), but that is limited to a maximum of $25,000 (that you can deduct from other income) and the rest of the loss will be carried forward.

Active Participation allowance: https://www.irs.gov/publications/p527#en_US_2022_publink1000219124

AmeliesUncle

@Helpless4 wrote:
I converted a single family residence to a rental property in 2022.

When it asks for the number of rental days and the number of personal days, are you entering ZERO personal days? You should be.

As a side note, those summary screens in TurboTax are sometimes faulty, so be sure to look at the actual tax forms themselves (Schedule E for your rentals).

Helpless4Author

@AmeliesUncle @Anonymous_ @Carl11_2

AmeliasUncle, that was the issue! I converted this property from my primary home to a rental this year, so I split it up accordingly when asked about personal use vs rental days. I missed the stipulation that said not to include days that you lived in the property (although I'm not sure what else would be considered personal use). I corrected that to only list the portion of the year that the property was rented, and it seems to have fixed the issue.

Thankyou all for the help.

Carl11_2

Employee

I missed the stipulation that said not to include days that you lived in the property

A vast majority do miss that, as they don't read the small print.

(although I'm not sure what else would be considered personal use).

A personal use day would be any day you lived in the property as your primary residence, 2no home, vacation home, or any other type of "personal use", *after* you converted it to rental property. So if you lived in the home for say, 2 weeks for the primary purpose of performing repairs, maintenance, and/or property improvements, those days would not be personal use days.