Can a rental unit that did not have depreciation applied simply be converted to non-rental?

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I have a unit that has not been depreciated. If the tenants move out and I decide to no longer rent, what are the tax consequences?

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  • KeriC
    KeriC FreeTaxUSA Agent
    Answer ✓
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    Yes, whether you sell the rental or convert it to personal use, you will still be required to recapture the depreciation that was allowable during the period of time it was used as a rental property.

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  • kbichard
    kbichard Member Level 2
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    Depreciation is required. When you sell the property you’ll need to “recapture” the amount of allowable depreciation regardless of whether you took the deduction over the years or not. Depreciation recapture is taxed as ordinary income.

  • rachels
    rachels FreeTaxUSA Agent
    edited November 2023
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    Hi geelmore1946,

    Kbichard is correct. Depreciation is required and will need to be "recaptured" when you sell the property, even if you did not actually claim depreciation on the property. This means that you pay tax on the amount of depreciation you should have taken (or did take).

    For more information, see: IRS Publication 527

    There are two methods available to correct missing depreciation:

    1. You can amend your prior year return to show the depreciation of the asset on the prior year return. This is typically only allowed if you only filed one prior return without the required depreciation.
    2. You can file Form 3115 to adopt a change in your accounting method. FreeTaxUSA does not file Form 3115, so you would need to fill out this form by hand, rather than prepare it on FreeTaxUSA.

    For more information on correcting the problem, see: IRS Publication 946

  • geelmore1946
    geelmore1946 Member Newcomer
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    I really appreciate the information. Is there any difference if I move into the unit myself? I have never taken depreciation.

  • Kristine2654
    Kristine2654 Member Level 4
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    Hi Geelmore1946,

    Yes, there is a difference. When you move into the rental unit to live there as your residence, you will not claim any depreciation.

  • geelmore1946
    geelmore1946 Member Newcomer
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    Thanks, but will I owe the IRS past depreciation even if I never claimed it?

  • KristineS
    KristineS FreeTaxUSA Agent
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    It's two things here you're asking. First, you will have to claim the depreciation yes, if/when you sell the rental, even though it was not claimed for all the previous years. This will end up acting like income on your tax return, just like wages or bank interest is income on your tax return. Second, whether you will owe taxes on this income depends on all the other income and expenses you have.

    The IRS rules state the "allowed or allowable" depreciation claimed. That means whether you claimed the depreciation or not on your tax returns for the rental (Schedule E specifically) during the years it was rented, the IRS assumes that you did claim it, even though you didn't.