Converting Rental Property to Personal Residence

[Yardley CPA]

I have a MFJ couple who have moved into the rental property they own in North Carolina (originally residents of New Jersey) during 2013. They rented the property for about 10 years and all income and expenses were included on Schedule E for the period. They plan on living in this home for the foreseeable future.

Now that they have moved into the rental as their primary residence, is there anything I need to be aware of from a tax standpoint? Obviously, there will no longer be an active Schedule E on their return (they do not own any other rentals.) Since they plan on living here for a period of time, I am not concerned with any type of depreciation recapture until (and if) they move and sell the property. I will take the mortgage interest and property taxes on their Schedule A. Besides this, is there any other issue that I am not thinking of?

Thanks!

[Terry D EA]

I think you have covered this very well. Only thing I see is the recapture of depreciation at the time of selling.

[Pacun]

You need to keep record of the FMV of the at the time of conversion. Ask the client to have that record handy and for the rest of their lives.

[jklcpa]

If they do sell in the future, and assuming that they otherwise qualify for the principal residence exclusion, the amount subject to recapture because of depreciation is not eligible for the exclusion. Also, a special rule enacted in 2009 limits the exclusion if the home was used for other than a principal residence, such as rentals or vacation homes. The gain would be prorated so that the exclusion is for only the time used as a residence, and the portion of the gain that relates to its use as a rental, vacation home, or other “nonqualifying use” after 2008 would not be eligible for the exclusion.

[Mr. Pencil]

They plan on living in this home for the foreseeable future.

Pardon my cynicism, but it's interesting how many people with this scenario can't "foresee" more than two years. Two years out of five, that is. Better bone up on nonqualified use for Section 121.

[Yardley CPA]

Mr. Pencil...you may be right but they are an older couple who moved "down south" after retirement and what they've voiced to me is that this is their retirement home. Time will tell.

[Mr. Pencil]

they've voiced to me is that this is their retirement home.

Oh sure--a long-term rental makes the best dream home for retirement! Well, I suppose you won't have to worry about it anyway. Again, pardon my cynicism, but when the time comes they will probably "want a local tax preparer." That is, one who doesn't know they rented the house for 10/12 of the time.

[Lion EA]

In chilly CT, many people pick out their retirement homes while still working and better able to qualify for a mortgage. Many use it as a second home, some as a vacation home, and some as a rental. Eventually (unless one passes away, and sometimes because one passed away) they move to that warmer clime. They usually continue to send their tax documents to me. I currently have clients in FL, NC, VA, and coastal CT. I have lost a couple to preparers in AZ, but their prior year returns contained the depreciation schedules, etc..

[kcjenkins]

Oh sure--a long-term rental makes the best dream home for retirement! Well, I suppose you won't have to worry about it anyway. Again, pardon my cynicism, but when the time comes they will probably "want a local tax preparer." That is, one who doesn't know they rented the house for 10/12 of the time.

A little cynical? That is actually a rather common way to pay for a 'retirement home'. And not all clients want to change preparers in order to cheat on their taxes.