Rental to sale

[Margaret CPA in OH]

Client had rental until end of June then extensive renovations to sell.  Am I correct that I have depreciation only until June?  However it wasn't disposed/sold until January 2018 so not sure how to manipulate that in ATX for 2017.  Ideas?

[Lee B]

I seem to remember that there was an extensive discussion about this topic last year ?

 

 

[Margaret CPA in OH]

Thanks, I'll look it up. I probably bypassed it then as not applicable at the time but now's the time!

[Terry D EA]

Margaret

This was taken from Pub 527. This does not address the issue of stopping the rental and then making extensive repairs to make the home marketable. I am of the opinion that any repairs or improvements made after the termination of rental activity would add to basis of the property as this is most likely not the owner's primary residence for the 121 exclusion. Adding to the basis would reduce the capital gains generated from the prior depreciation and appreciation of the property.

You stop depreciating property when you retire it from service, even if you haven’t fully recovered its cost or other basis. You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events.

• You sell or exchange the property.

• You convert the property to personal use.

• You abandon the property.

• The property is destroyed.

[Margaret CPA in OH]

Thanks, Terry.  It makes/made sense to me to stop depreciation as of end of June but do I mark it as abandoned (even though it wasn't)?  It wasn't sold then or converted to personal use or destroyed.  It never was a personal residence, always a rental. I can't show the disposal at that time as significant improvements were made prior to sale which obviously affects the basis.  But how to keep it in the return while adding to the basis but not taking depreciation is my dilemma.  Wish it had sold in December!

Still scratching my noggin.

[Max W]

It has been a while since I  used ATX, but can't you change the business use from 100% to 50% on the depreciation.  If it affects the expenses, you can adjust those accordingly.

[jklcpa]

2 hours ago, Margaret CPA in OH said:

do I mark it as abandoned

No, I wouldn't do that. That is for an asset that is scrapped for -0- dollars in return. Doing that would also remove the asset from the return this year and would not rollover for next year when the sale occurs.

Isn't there a choice for "retired" or "out of service"?

As far as the renovations to add to basis without depreciation, there should also be a choice to add an item as basis that is nondepreciable, similar to land.  If no other way, add it as a depreciable and either override the depreciation to be -0- or use the same method as for the basis that's already on there (retired or out of service).

[Margaret CPA in OH]

Max and Judy, what a team!  I think the two of you have combined for a solution.

The options are Sale/abandonment; Installment sale; Casualty/theft; Like-kind exchange; Converted to personal use; or do not calculate gain/loss.  None of these fit this situation but I can change the use to 50%, add the renovations as non-depreciable and sell the sucker in January!  I'll check the depreciation calcs but honestly think this will work.

Great minds on this forum!  Again, what a team.

[Lee B]

The ATX workaround for this situation is to change the business use to 00.01 % or.0001.

 

[Abby Normal]

It was converted to personal use (non-rental) on 6/30. That doesn't mean it was a residence. Deal with next year, next year.

[Abby Normal]

Or just override the depreciation to half of what is calculated.

[Margaret CPA in OH]

Well, I'm not convinced that taking it out of service to renovate for sale is the same as converting to personal use.  This is an LLC filing a 1065.  I'm going to go with the 50% depreciation and non-depreciable additions so that the sale next year will have all the data there.  Who knows what other surprised might appear?  But I do have the closing documents so can let them know the result for 2018.  I just needed to get the basis ready.

Thanks to all for the valuable input.  Now back to the Germans...  2018 is going to be veeerrrrryyy interesting!