Residential Rental

[Lion EA]

Married clients rented their primary residence after living there for many years. After a couple of years, they returned, moved back in, renovated, got divorced. Wife is now my client, owns the house, has been living there for years with her children, finished a "bonus" room, and tried to sell.

She's receiving offers to rent. If she rents her home, do I pick up where she left off on her last depreciation schedule and add lines for renovations since that time? Or, do I start a new incidence of rental for 27.5 years?

I understand the basis calculations. It's the time I'm unsure of when there's a lengthy break between rentals. 27.5 years or 27.5 minus the years rented in the past?

[jainen]

>>27.5 years or 27.5 minus the years rented in the past? <<

I think you can do it either way, because starting over would be a longer depreciation schedule than continuing the original one.

Suppose the original basis just happened to be $275000. After 15 years they had recovered $150,000 and the adjusted basis was down to $125,000. You can continue to deduct $10,000 per year for 12.5 years. In addition, you can take the remodels as a new asset over 27.5 years. If that is too complicated, you can lump the $125,000 adjusted basis with the remodels, and start the whole thing over. IRS doesn't mind, because the annual deduction is a lot less when you spread the $125,000 over the longer period.

[Pacun]

I would check the adjusted basis right before remodeling (deducting depreciation). Then I would add the cost of remodeling. Next, I would compare the new adjusted basis of the house and the FMV and use the lower of the two and use 27.5 years.

Since the house was taken out from the rental busines, I think the IRS wouldn't mind.

[Lion EA]

Thank you. At this point, I'm just doing a "what if" for the client as they decide if it makes sense to pay to move, rent a smaller place for themselves, and rent their large house vs. staying put until it sells. So, I can finalize the years later; not a huge difference since rented only a few years in the past. She's gathering the info so I can calculate basis and expenses.

I just couldn't find this situation where the same house with one of the same owners was rented during two distinctly differents times during a long ownership.

[jainen]

>>staying put until it sells<<

Remember that gain attributed to depreciation BEFORE 1997 can be excluded under Section 121.

[TAXBILLY]

>>staying put until it sells<<

Remember that gain attributed to depreciation BEFORE 1997 can be excluded under Section 125.

Or perhaps Section 1250 instead?

[Lion EA]

I know. It's a whole 'nother issue she'll have to consider if they rent for several years and then sell or rent for just a couple of years and still qualify to exclude as sale of primary residence. And, if they marry, boyfriend will have to meet the use test to qualify for $500,000 exclusion.

She hasn't gotten me cost info, and they're leaving on vacation Thursday. I'm at clients' sites Wednesday and Thursday.

I hope they don't rent it furnished !!

[joanmcq]

Don't forget that the prior depreciation taken doesn't go away; it's still prior depreciation, and will be recaptured when sold, regardless of whether it is rented again.

[Lion EA]

This is all great help, reminding me of what to discuss with them. Thanx, everyone.