How does the partial use of a property for personal purposes affect the start of depreciation in 2024 when it becomes available to rent?
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When a property that was previously used for personal purposes is converted to rental use, the rules for when depreciation begins and how it is calculated are specific and nuanced. Here’s a comprehensive explanation for 2024:
1. When Does Depreciation Begin?
Depreciation begins when the property is “placed in service” for rental use. This means the property is ready and available for rent, not necessarily when it is actually rented. For example, if you finish repairs and list the property for rent on July 1, but it is not actually rented until September, the property is considered placed in service on July 1, and you may begin depreciating it from that date.
2. Effect of Partial Personal Use Before Rental
If you used the property for personal purposes before converting it to rental use, you cannot claim depreciation for the period of personal use. Depreciation only starts when the property is available for rent (i.e., when it is placed in service as a rental property).
3. Basis for Depreciation After Conversion
When you convert a property from personal to rental use, the basis for depreciation is the lesser of:- The property’s adjusted basis (original cost plus improvements, minus any deductions such as casualty losses) on the date of conversion, or- The fair market value (FMV) of the property (excluding land) on the date of conversion.
This rule ensures that you do not depreciate a value higher than what the property is actually worth at the time it becomes a rental.
4. Dividing Expenses Between Personal and Rental Use
If the property was used for personal purposes for part of the year and then converted to rental use, you must allocate annual expenses (such as mortgage interest, property taxes, and insurance) between personal and rental use based on the number of months (or days) used for each purpose. However, depreciation is only allowed for the period after the property is placed in service as a rental.
5. Example
Suppose you lived in your home from January through May, then made it available for rent starting June 1, 2024. You would:- Allocate annual expenses (like property taxes and mortgage interest) between personal and rental use (5/12 personal, 7/12 rental).- Begin depreciating the property as of June 1, 2024, using the appropriate MACRS table for residential rental property (27.5-year straight line, mid-month convention).
6. Depreciation Method and Convention
For residential rental property, you must use the straight line method over a 27.5-year recovery period, applying the mid-month convention. This means in the first year, you only claim depreciation for the number of months the property was in service, counting from the middle of the month it was placed in service.
7. Additions or Improvements
If you make improvements after the property is placed in service as a rental, those improvements are depreciated separately, starting when they are placed in service, using the same recovery period as the main property if they are structural.
8. Summary Table of Key Points
- Depreciation begins: When property is available for rent (placed in service as rental).
- Personal use before rental: No depreciation allowed for personal-use period.
- Basis for depreciation: Lesser of adjusted basis or FMV at conversion date.
- Expense allocation: Divide annual expenses between personal and rental use.
- Depreciation method: Straight line, 27.5 years, mid-month convention for residential rental property.
- Improvements: Depreciated separately from the date placed in service.
9. Conclusion
Partial personal use before rental delays the start of depreciation until the property is placed in service as a rental. The basis for depreciation is limited to the lower of adjusted basis or FMV at conversion, and only the period after conversion is eligible for depreciation deductions.
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