Depreciation of Property Converted Back and Forth from Personal to Rental

[Ed Shin]

We converted our primary residence into a rental when we were stationed overseas five years ago. During those five years, we claimed depreciation (based on a 27.5 year depreciation schedule), mortgage interest, and other costs associated with our rental on Schedule E and reported suspended passive losses on form 8582 - based on consultations with a professional real estate CPA. After those five years, we have lived in our house as our primary residence while stationed back in the U.S. over the last year, so we ceased claiming depreciation and other rental costs.

Next year, we will rent out our house again. The real estate CPA with whom I previously consulted advised that we should pick up where we left off on the previous depreciation table from before (i.e. continue to claim the same amount of depreciation with 22.5 years left on the original 27.5 year depreciation table) and depreciate over 27.5 years any improvements made to the house while we lived in it over the past year. A couple of friends who have been in a similar situation said that CPAs with whom they have consulted have advised the same course of action.

However, a CPA at a rental property seminar I attended advised that we should start a brand new depreciation table with a new adjusted basis. Per this CPA, we should take the adjusted basis from five years ago, subtract the amount of depreciation taken over those five years, add the cost of improvements made while the house was a primary residence over the last year, and depreciate over 27.5 years.

Given the conflicting guidance, I'd welcome any suggestions on the best course of action for claiming depreciation on our house when we place it back into service as a rental property. Thanks.

[Linda Weygant]

Agree with @Ashish Acharya - it's technically the same thing.  However, given a preference, I would show it and document it the way you originally outlined it.  If I were taking this tax return on and was trying to figure out what was going on, I'd find it much easier to follow using the first method.

The second method would make me think that somebody had screwed up basis calculation and depreciation life.