Depreciation on Rental Property After Recovery Period

123Meow

Can I depreciate improvements on a rental property after it's useful life/recovery period has ended, if there is still basis remaining?

For example: a $10,000 improvement with a life of 10 years placed in 2013 without any bonus or other special depreciation. During 2013-2023, 80% of the property was used for rental purposes and 20% was used for personal purposes. $800 of depreciation was deducted each year using straight line, with accumulated depreciation at $8,000 in 2023.

Even though 2024 is past the 10 year recovery period, am I still allowed to depreciate $800 that year because there is still $2,000 of undepreciated basis remaining?

MatthewD

Hello 123meow,

You have a couple principles to consider when looking at this situation. It seems reasonable that there would be an addtional $2,000 of basis remaining to depreciate. However, it isn't that simple. From IRS publication 946:

"Conversion to business use. If you place property in service in a personal activity, you cannot claim depreciation. However, if you change the property's use to use in a business or income-producing activity, then you can begin to depreciate it at the time of the change. You place the property in service in the business or income-producing activity on the date of the change."

This principle would seem to indicate that the mixed-use property can be depreciated for the remaining 2,000 however, let's look at this next rule.

"Property changed from personal use. If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following.

1. The FMV of the property on the date of the change in use.
2. Your original cost or other basis adjusted as follows."

At the time you convert that improvement to 100% business use, you need to evaluate what the current value is. If it is less than the initial cost of $10,000 and is worth less than $8,000, then there is nothing left in the basis to depreciate. However, if it is still worth the $10,000 or more than 8,000, then you can use your original cost and have up to $2,000 you may claim in depreciation. The new depreciable basis in the improvement is the. (original cost (or FMV) - accumulated depreciation) or up to $2,000.