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Question

depreciation being possibly incorrectly included on property rented < 1 year

Forum|Forum|4 years ago
April 11, 2022
3 replies
0 views

I closed on a condo on 5/4/21. At that time the property was tenant-occupied and I assumed ownership of their lease. The tenants occupied the property until their lease ended on 6/30/21 and I moved in two days later. The condo was my primary residence for the remainder of 2021.

I received prorated rent for May from the condo's seller as a part of the closing transaction and a rent payment from the tenants for June. During 2021 I paid insurance, mortgage interest, HOA dues, and repairs on the condo.

I entered all of this into TurboTax and it is giving me a depreciation credit I don't think I should have. Here is how I entered the information into TurboTax:

"Tell us about your situation this year"

-> "First year rented"
-> "Converted home to rental or rental to home"

"How was condo converted?"

-> "From rental to primary residence"

Then TurboTax tells me:

Since your rental became your home, we'll walk you through stopping depreciation on your rental property and rental assets in the Assets section later. Make sure to keep a copy of your depreciation report, you'll need it if you sell the property.

I then filled out the rest of the information (expenses, etc.). When I click on the Edit button next to the "New rental property" text under the "Assets" heading, I reach a screen that says:

"Congrats on renting out condo for the first time!"

Since this was your first year renting this property, we’ll determine its cost basis and depreciation. We’ll calculate this based on info from closing documents such as a HUD-1 settlement statement. You’ll only have to set this up once and we’ll automatically calculate your deduction each year.

I then answered the following questions:

"Was this property your residence in the past?"

-> No

"Did you purchase this property?"

-> Yes

I then went through several more screens of entering purchase information (original purchase price, purchase date = sale date, escrow fees, property tax info, etc.) and finally reach a screen that says:

Rental expense deduction
$7,292

The deduction appears to be due to depreciation but I don't believe it applies to my situation. IRS Publication 527, page 6 says (https://www.irs.gov/pub/irs-pdf/p527.pdf😞

Excepted property. Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated, you can’t depreciate the following property.
• Property placed in service and disposed of (or taken out of business use) in the same year.

Given the above, is this a problem and how do I fix it? Did I answer a question incorrectly during the interview?

TurboTax Premier Online

ColeenD3

You are correct. You do not take depreciation for property that is placed in service and removed from service in the same year. Did you enter the date of purchase, and the date of the conversion?

hudson4351Author

I think I found part of the problem - I forgot to enter my days of personal use. Once I did that, the depreciation credit dropped off.

Related question - now it's showing 0 net income for the rental even though rental income exceeded the portion of expenses allocated during the time the property was rented. Does that sound correct?

AnnetteB6

No, it does not sound correct. You should have no personal use days entered. Personal use only applies during the period of time that the property was considered to be a rental property.

It was a rental property from the time that you purchased it until the time that you converted it to your personal residence. You would only enter personal use days if you used the property during that couple of months that it was considered to be a rental property.

@hudson4351

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Carl11_2

Employee

For your specific and explicit situation, this is simplicity at it's best. For that property in the assets/depreciation section, simply enter the same exact amounts in both the COST and COST OF LAND column. Then no depreciation will be taken.

hudson4351Author

@Carl11_2

Given that this isn't accurate, wouldn't I need to file an amended return to fix the basis if I ever decided to rent the property out in the future?

AmeliesUncle

Despite what Publication 946 says, I am convinced that depreciation *IS* allowable for real estate even if it is in service for less than a year.

There is a Regulation that states the rule that depreciation for property that was "placed in service" and taken out of service during the same year is not allowed. However, that Regulation does NOT apply to real estate, and even though I have extensively looked, I have never found anything that disallows the depreciation for real estate.

So that is why TurboTax is calculating the depreciation.

hudson4351Author

> However, that Regulation does NOT apply to real estate, and even though I have extensively looked, I have never found anything that disallows the depreciation for real estate.

This is possibly a dumb question, but what is the difference between a "property" and "real estate" in the context of your post? I would think those terms are interchangeable but this is the first time I've ever had to consider depreciation.

I ended up filing my taxes with a different product and their support reps confirmed I was not seeing any depreciation in their version of my taxes due to Publication 946. It's also possible their software was wrong.

AmeliesUncle

@hudson4351 wrote:

what is the difference between a "property" and "real estate" in the context of your post?

Property is anything that you own, such as a refrigerator, a hammer, a house. Real estate is land and generally items permanently attached to it (such as a house).

The Regulation I was referring that does not allow depreciation when "placed in service" and taken out of service is for Half-Year and Mid-Quarter conventions (which deals how items are depreciated the first and last year). But real estate (in tax terms, Section 1250 property), does not use the Half-Year and Mid-Quarter convention (it uses the Mid-Month convention), so that Regulation I referred to does not apply to real estate.