How does the cessation of AirBnB activity in a primary residence impact depreciation and tax reporting on the 2024 Form 1040 for Married Filing Jointly taxpayers?
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When a married couple filing jointly ceases to rent out part or all of their primary residence as an AirBnB (or other short-term rental) in 2024, several tax and depreciation consequences arise. The key issues are:
- Depreciation Recapture and Cessation of Rental Use
- Allocation of Expenses for Mixed-Use Property
- Reporting Rental Income and Expenses on the 2024 Return
- Adjusting Basis for Future Sale
- Potential for Passive Activity Losses and Carryovers
1. Depreciation Recapture and Cessation of Rental Use
Depreciation Deductions Stop:When you stop using part or all of your home for rental (AirBnB) purposes, you can no longer claim depreciation deductions for that portion after the date of cessation. Depreciation is only allowed for the period the property is used in a rental activity. For example, if you rented out a room from January through June and then stopped, you can only claim depreciation for that portion of the year.
Recapture Not Triggered by Cessation Alone:Simply ceasing rental activity does not trigger immediate depreciation recapture. Recapture of depreciation occurs when you sell or otherwise dispose of the property. At that time, any depreciation claimed (or allowable) for the rental period must be "recaptured" as ordinary income to the extent of gain on the sale.
Adjusting Basis:You must reduce the basis of your home by the total depreciation claimed (or allowable) for the rental period. This lower basis will affect the calculation of gain or loss when you eventually sell the home.
2. Allocation of Expenses for Mixed-Use Property
Dividing Expenses:If you used part of your home for rental and part for personal purposes during 2024, you must allocate expenses (mortgage interest, real estate taxes, utilities, insurance, etc.) between rental and personal use based on a reasonable method, such as square footage or number of rooms. Only the portion attributable to rental use is deductible on Schedule E.
Partial-Year Rental:If you stopped renting during the year, you must also allocate annual expenses (like property taxes and insurance) between the rental and personal periods, typically based on the number of days each use occurred.
3. Reporting Rental Income and Expenses on the 2024 Return
Schedule E Reporting:Report all rental income received during the period the property was rented on Schedule E (Form 1040). Deduct allowable rental expenses, including depreciation for the rental period, on Schedule E as well.
Personal Use After Cessation:After you stop renting, expenses for the personal-use portion of the home (including the former rental area) are no longer deductible as rental expenses. However, you may be able to deduct mortgage interest and property taxes on Schedule A if you itemize.
No Rental Income/Expense Reporting After Cessation:Do not report rental income or expenses for periods after the property is no longer available for rent. If you resume renting in a future year, you would begin a new depreciation schedule based on the adjusted basis at that time.
4. Adjusting Basis for Future Sale
Depreciation Reduces Basis:The total depreciation claimed (or allowable) during the rental period reduces your basis in the home. When you sell the home, you must recapture this depreciation as ordinary income (up to the amount of gain) under IRC §1250.
Home Sale Exclusion:If you later sell your primary residence, you may qualify for the home sale exclusion ($500,000 for MFJ) under IRC §121, but the exclusion does not apply to the portion of gain attributable to depreciation claimed for rental use after May 6, 1997.
5. Potential for Passive Activity Losses and Carryovers
Passive Activity Loss Rules:If your rental activity generated a loss, the passive activity loss rules may limit your ability to deduct the loss. Unused losses may be carried forward and can be deducted in full in the year you dispose of your entire interest in the rental activity in a fully taxable transaction.
Example
Suppose you rented out a room in your home as an AirBnB from January 1 to June 30, 2024, then stopped and used the entire home for personal purposes for the rest of the year.
- Depreciation: You may claim depreciation for the rental room for 6/12 of the year, based on the room’s proportion of the home’s basis.
- Expenses: Mortgage interest, property taxes, utilities, etc., are allocated between rental and personal use by both space and time.
- Schedule E: Report all AirBnB income and allowable expenses (including depreciation) for the rental period.
- After June 30: No further rental deductions or depreciation for the former AirBnB space.
- Future Sale: When you sell the home, the total depreciation claimed for the rental period must be recaptured as ordinary income, and your basis is reduced by that amount.
6. Summary Table of Key Actions
In summary: When you stop renting out your primary residence (or a portion) as an AirBnB, you must stop claiming depreciation and rental expenses as of the cessation date. You report all rental income and expenses for the rental period on Schedule E. After cessation, the property is treated as personal-use property, and only personal deductions (like mortgage interest and property taxes, if you itemize) are allowed. The total depreciation claimed during the rental period reduces your basis and must be recaptured as ordinary income if you later sell the home at a gain.
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