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How to properly depreciate a home that was used as a rental property for part of the tax year, and then converted into a primary residence the other part of the tax year (or sold/disposed of the home).

When going through the Schedule E Supplemental Income and Loss section of the TaxAct® program, you will want to make sure you only enter the number of Days of personal use on the screen titled Rental Income - Personal Use if the home was used for personal purposes DURING THE RENTAL PERIOD (you will see this mentioned on that screen). If you did not use the home for personal purposes during the rental period, then you would leave this blank.

A few screens later, you will come across a screen titled Rental Income - Disposal. If you have permanently taken this property out of business/rental use, but have not disposed of the property in a fully taxable transaction with an unrelated party, then you would want to select No when the program asks if you disposed of your interest in this property. Conversely, if you did dispose of your interest in the property in a fully taxable transaction with an unrelated party, then you would select Yes.

You will then want to properly indicate this disposal within the depreciation section, if you had been depreciating the rental home. The depreciation section will come immediately after you enter your rental income and expenses (if you have already entered your applicable income and expenses, then you can select No on those screens to pass those sections and move directly to depreciation).

On the screen titled Rental and Royalty Income - Topics, click Review on the "Depreciation and Amortization" row. On the screen titled Rental Income - Depreciation, click Yes to indicate you do have depreciation expenses to continue. On the screen titled Depreciation and Vehicle Expense - Entry Method, click Step-by-Step Guidance, then continue. You will come across a screen titled Depreciation - Disposed, where you will want to enter the Date sold. Even if you did not sell the home, you did dispose of your rental interest in the home. By entering this date on this screen, the TaxAct program will automatically calculate the part-year depreciation for you.

How to properly depreciate a home that was used as a primary residence for part of the tax year, and then converted into a rental property the other part of the tax year

When going through the Schedule E section of the TaxAct program, you will want to make sure you only enter Days of personal use on the screen titled Rental Income - Personal Use if the home was used for personal purposes DURING THE RENTAL PERIOD (you will see this mentioned on that screen). If you did not use the home for personal purposes during the rental period, then you would NOT want to enter Days of personal use.

Enter the rental income and expenses for the portion of the tax year the home was used as a rental property. When you get to the depreciation section, click + Add Schedule E, Pg 1 to create a new asset. You will want to enter a Date in service, which reflects when the home was converted into a rental property. Based on the date you enter, the TaxAct program will automatically calculate the current year's depreciation. For example, if you enter a Date in service of "July 1, 2020," the TaxAct program will appropriately calculate only a half year of depreciation.

To access the Rental Income (Schedule E) section of the TaxAct program:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Rent or Royalty Income in the Federal Quick Q&A Topics menu to expand, then click Real estate rental income.
  3. Click + Add Schedule E, Pg 1 to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of the appropriate information.

You may wish to refer to IRS Instructions for Schedule E Supplemental Income and Loss or IRS Publication 527 Residential Rental Property (Including Rental of Vacation Homes) for additional information.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.


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