Tricky depreciation on a condo

5 Replies

Hello everyone,

I am trying to figure out how to depreciate my rental property. Any help would be greatly appreciated!

Here's the details. We bought the condo in 2006 (towards the height of the bubble..) for around 180k, lived in it for about a year then moved away. We didn't know anything about depreciation and failed to take advantage of it while initially renting it out. After about 3 years of renting, we moved back in. After 4 years, we moved out and are now renting it again; and are more educated on the way rentals work. We want to depreciate it for tax purposes but are unsure exactly how to do so because of buying during the peak of the market. The market value of the property is now about 140k. Do I depreciate based on the purchase price and upgrades to the property, or depreciate the market value?

Thanks again for any advice!

-Kevin

@Kevin Roy

You have a very unique scenario.

When you convert a personal residence to a rental property, you depreciate the property based on the FMV at the date of converting it to a rental property.

You are also required to take depreciation...which you did not do. You can normally "catch-up" the depreciation if you missed depreciation in the past by filing a "change in accounting" form. However, you also changed it back to a personal residence for a period.

Furthermore, it may be hard to find out what the FMV of the property when you initially converted it to a rental.


All in all, you have a very unique scenario...The accountant you go with may have to research a couple court cases to see how to properly fix your issue.

@Basit Siddiqi

Thank you for your reply! So I was under the impression that you could add any improvements to the property and things like points paid during the purchase price and depreciate that total price. Is that only for pure investment properties and not personal residence turned into rentals?

Originally posted by @Kevin Roy :

Hello everyone,

I am trying to figure out how to depreciate my rental property. Any help would be greatly appreciated!

Here's the details.  We bought the condo in 2006 (towards the height of the bubble..) for around 180k, lived in it for about a year then moved away.  We didn't know anything about depreciation and failed to take advantage of it while initially renting it out.  After about 3 years of renting, we moved back in.  After 4 years, we moved out and are now renting it again; and are more educated on the way rentals work. We want to depreciate it for tax purposes but are unsure exactly how to do so because of buying during the peak of the market.  The market value of the property is now about 140k.  Do I depreciate based on the purchase price and upgrades to the property, or depreciate the market value?

Thanks again for any advice!

-Kevin

Hey Kevin, 

So as mentioned depreciation is not option- so you need to go back and use a special form to account for that missed depreciation. 

When you convert to a rental you depreciate it based on the LOWER of the purchase price, or the FMV at the time you converted it.

There depreciation schedule would basically pause for those years you moved back in, and continue on the same timeline once it was moved back into being a renal. 

Any upgrades and renovations come into account as well. 

@Kevin Roy I think you are only required to keep tax revords for 3 years so the first rental period in no longer of record...as if it never happened. You didnt depreciate so no harm no foul, imo. But now do everything correctly...first thing is to go to the irs site and read the official instructions...they tell you how to come up with cost basis...and not 100% trust people on the internet for tax advice. You can trust jk lasser or nolo...established (20-40 years) book publishers with editorial staff that check for errors.