Depreciation on rental property using 27.5 year method but with personal use of property

cjmpls
cjmpls Member Posts: 1 Newcomer
in Situation & Life Changes

I own rental property and depreciate using the 27.5 year method. Can anyone provide clarity around how it works if I started the depreciation on year one, but at year five I lived in it for 2 years (personal residence). After those 2 years, it went back to rental property. In this situation, does the 27.5 year timeline bump out for 2 more years of depreciation, or does it work that once the depreciation timeline starts, it ends at 27.5 years regardless?? I can't find this info on IRS site on how to handle.

In another example scenario-if I purchase rental property and rent it out for 1 year, and use 27.5 year method. At year 2 I live in it for 25 years (personal residence). If I then rent it out again as rental property, have I lost my window to depreciate, or how does it work?

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Best Answer

  • CoryF
    CoryF FreeTaxUSA Agent Posts: 198
    Answer ✓

    Hello Cjmpls

    This is a complicated situation when you mix rental and personal use. During the rental period the building is subject to depreciation. This is not just a line item reported on the Schedule E. The actual calculation of depreciation is like reducing the book value of the home. Another term for book value is Cost Basis. When you converted the home back to Personal at year five, you take the accumulated depreciation (from the rental period of 4 years) and reduce the Cost Basis of the home permanently. Then after the 2 years of Personal use, you convert it back to Rental, the Cost Basis after the accumulated depreciation during the 1st period of rental is then applied for further depreciation after the conversion. This starts a new 27.5 year period to depreciate the Cost Basis after converting to Rental again.

    For Example:

    Rental property Cost Basis: 300,000

    Accumulated Depreciation (4 years): $54,546

    New Cost Basis: 300,000 - 54,546 = 245,454

    $245,454 will become the new cost basis for the new rental period (after the two years of personal use) over the newly started 27.5 year depreciation life for a Residential rental.

    This would apply to the example scenario. After the 1 year, you take the depreciation expense off of the cost basis of the home when you converted it to personal for the 25 years. Then using that cost basis after the personal use, you would start a new 27.5 year depreciable life with the reduced cost basis after the initial 1 year rental

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