Returning rental to owner after having made some Leasehold improvements

Forum|Forum|4 years ago
March 16, 2022
2 replies
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I rented a home from someone and rented it out on Airbnb. I spent money putting in a new kitchen and driveway and have not fully captured the depreciation on the renovations. I returned the home to the owner in 2021 and walked away from the business. I would like to capture my entire depreciation. Would I dispose of this asset as a sale with a value of $0?

Best answer by AmeliesUncle

The other answers are wrong.

Yes, you were able to depreciate your Leasehold Improvements.

Yes, you can write of the rest of the amount in the year that you abandon them.

EDIT: I think this next paragraph is incorrect for this situation; See comment later.

However, if you enter a sale price of $0, the program will treat it as a capital loss. But in the case of abandoning a Leasehold Improvement like you did, it should be a an "ordinary" loss (which is better for you). I strongly suspect that TurboTax is not set up for that. If that is the case, a work-around might be to first go to the rental section and say you converted that "asset" to personal use (that will keep the correct depreciation for the year). Then enter the sale in the "Sale of Business Property" section, but when you enter the purchase/placed-in-service date, enter a fictitious date that is less than one year before it was sold (which will then treat it as an "ordinary" loss rather than a "capital" loss).

J

JillS56

As a renter of real property, you are not eligible to take depreciation on the renovations you made to this property. Even if you were the owner of the property, you would not be able to take full depreciation of the renovations in one year. Depreciation is an accounting method that spreads the cost of an asset over its expected useful life.

To take depreciation on property it must meet all the following requirements:

It must be property you own.
It must be used in a business or income-producing activity.
It must have a determinable useful life.
It must be expected to last more than one year.
It must not be excepted property. Excepted property (as described in Publication 946, How to Depreciate Property) includes certain intangible property, certain term interests, equipment used to build capital improvements, and property placed in service and disposed of in the same year.

Even if you owned the property you could not accelerate the depreciation to take it all in one year unless the property is eligible for Section 179 treatment. Section 179 can only be taken in the taxable year you place the qualifying property in service. Real Property does not qualify for the Section 179 Deduction. Real Property is typically defined as land, buildings, permanent structures, and the components of the permanent structures (including improvements not specifically covered on the qualifying property page).

Topic 704 Depreciation

Non-Qualifying Property for Section 179

You asked the question: Would I dispose of this asset as a sale with a value of $0? You have no asset to dispose of.

P

pbmunkeyAuthor

Employee

I rented it from the landlord in 2019 and did the renovations then. I returned the house in 2021. If I’m not able to depreciate the renovations, what was the proper way to write it off?

J

JillS56

Since you are not the owner of the property, you cannot write off the cost of the renovations. You must be the owner of the property in order to depreciate or write off the cost of the renovations.

A

AmeliesUncleAnswer

The other answers are wrong.

Yes, you were able to depreciate your Leasehold Improvements.

Yes, you can write of the rest of the amount in the year that you abandon them.

EDIT: I think this next paragraph is incorrect for this situation; See comment later.

However, if you enter a sale price of $0, the program will treat it as a capital loss. But in the case of abandoning a Leasehold Improvement like you did, it should be a an "ordinary" loss (which is better for you). I strongly suspect that TurboTax is not set up for that. If that is the case, a work-around might be to first go to the rental section and say you converted that "asset" to personal use (that will keep the correct depreciation for the year). Then enter the sale in the "Sale of Business Property" section, but when you enter the purchase/placed-in-service date, enter a fictitious date that is less than one year before it was sold (which will then treat it as an "ordinary" loss rather than a "capital" loss).

A

AmeliesUncle

After thinking about it, the last section of my last comment about "capital" versus "ordinary" may be wrong in your situation (I shouldn't be answering questions right before going to bed).

Because the improvements are being transferred to the landlord, I don't think that is considered an "abandonment", therefore entering $0 as the sale price for a capital loss would be the correct method.