Depreciation and converting a Vacation home to a rental

Tahoe City, CA · Member since 2010 · 16 posts · 3 votes

I'm thinking of converting a vacation home to a rental. Obviously I can get depreciation advantages, but how do I do that? Do I simply start taking depreciation on Schedule E? Can I get retroactive advantages? How do I report depreciation/recapture taken when I sell?

Thanks!

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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
9y
@Tom Mitchell, for how many days (if any) this year have you used this particular property for personal use?
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Tom Mitchell
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Tahoe City, CA · Member since 2010 · 16 posts · 3 votes
9y
Probably 20 or so.
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Lance LvovskyPro Member
Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
9y
Once rented, the property will be reported on Schedule E. Cost basis the lower of adjusted tax basis or FMV on the date you place the property in service, which for most taxpayers, you would use your adjusted tax basis.
Depreciation recapture will be reported in the year you sell the property. My recommendation: get with a CPA who knows what they are doing. It is worth the cost.
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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
9y
@Tom Mitchell

There is a 15-day rule when it comes to vacation homes. These would only apply for 2017, though, since it seems that you're contemplating making it a rental from here on out. I've expanded on the 15-day rule below.
- If you use it for personal use 15 days or more, and you rent it out less than 15 days during the year, then it's considered a "tax-free vacation home." All the rental income you receive is tax-free, and you report no income or expenses on Schedule E. You deduct real estate taxes as mortgage interest on Schedule A. If you have more than one vacation home, you must select the one to be treated as the second home for mortgage interest deduction purposes.
- If you use it for personal use less than 15 days OR no more than 10% of the days you rented it out, and you rent it out for 15 days or more, then it's considered a vacation home used as rental property. In this case, you can deduct the full amount of direct rental expenses such as property management fees, advertising fees, credit checks, etc. However, for other costs -- property taxes, mortgage interest, repairs, maintenance, cleaning, insurance, utilities, and yes, depreciation -- you must allocate them based on the amount of time the property was rented and the time it was used personally (using the total number of days the property was used during the year as your denominator). Expenses for the rental period go on Schedule E along with the direct rental expenses. You can deduct the property taxes for the personal use period on Schedule A along with your other itemized deductions. You cannot take an itemized deduction for mortgage interest on Schedule A, however.
- If you use it for personal use more than 14 days OR more than 10% of the days you rented it out, and you rent it out for 15 days or more, then it's considered a vacation home used as a residence. This sounds like your situation (assuming you are going to rent it out soon) for 2017. Under this scenario, you can only carry forward any losses you generate to future years, but they may only be applied to rental income from that same property. And in calculating your expenses, you must deduct them in this order:
  1. Mortgage interest and property taxes to the extent the property was used as a rental
  2. Direct rental expenses
  3. Operating expenses to the extent the property was used as a rental
  4. Depreciation to the extent the property was used as a rental
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