Depreciation Problem

[Edward]

Client operated Motel from 1995 to 31 Aug 2003. Has been IDLE since but in 2008 began remodeling with intent of leasing some of the units as "office space". Both the motel and office space would have 39Y S/L. The following has surfaced in regards to depreciation planning:

a. Page 9-21 of TAX BOOK says: IDLE PROPERTY: Continue to CLAIM a depreciation deduction on the property even if it is temporarily idle. For example, if use of a machine stops because there is a temporary lack of a market for a product made with the machine, continue to DEDUCT depreciation." Not applicable in this situation as business CLOSED in 2003 and there is no need for a Sch C as there is no income. So we can forget this approach.

b. QF Depreciation Manual sys: IDLE assets will continue to be depreciated until the asset is sold, retired, abandonded or otherwise disposed of. This too wouldn't apply as they don't say anything about if the asset is again placed back in service at a later date?

c. I would think that maybe I should accrue the depreciation from 1 Sept 03 up to the day prior to placing the assets back in service; with depreciation after that date being deducted on the 2009 tax return?

d. I also see a problem completing the ASSET ENTRY, like date placed in service (1995 or 2009); would forcing the accumulated depr be a problem & what other elements must be considered? Any ideas would be appreciated. Thanks!

[RoyDaleOne]

Research how to depreciate property that is converted to personal use and back to business use.

I would guess no depreciate from time of retirement to the time of conversion from retirement.

I would guess you use the adjusted basis as of the retirement date as the depreciable basis on the date of conversion back to business use.

I would guess the depreciation period would start over.

See Pub 946, it many help.

[jainen]

>>date placed in service (1995 or 2009)<<

The property was not "idle." After 03 you might call it investment or personal, but it was certainly not held for productive use in a trade or business. When it is again placed in service, start a new 39-year schedule in the normal way. The new basis is the lower of current FMV or adjusted basis. Software varies, but one way or another you will want to note how the adjusted basis and FMV were determined.

You could probably make a reasonable argument for simply restarting the old depreciation schedule. That might offer a faster write-off for the balance of the original cost. (You would of course still need a new schedule for the recent improvements.) Before spending a lot of time researching that approach and setting up multiple depreciation schedules, find out if it even fits the taxpayer's long-term plans.