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Lev
Lev, Tax Advisor
Category: Tax
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Have 2 properties, one is personal residence, the other has

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Have 2 properties, one is personal residence, the other has been income property for 18 yrs. Converted personal property to rental, converted rental to personal. If owner holds title to both, can he treat this transaction as a like-kind exchange (move depreciation one to the other) or does he need to recapture all of the depreciation on the rental converted to personal? rental that was converted has 2 owners on the title, 2nd owner is aware he will have to recapture his half of the depreciation taken.

Lev :

Hi and welcome to our site!
In order to satisfy section 1031 rules - the property must be sold or otherwise exchanged - in this case the ownership is not changed.
The old and new properties - both - for section 1031 must be investment or income producing properties - none could be personal property.
When the property is NOT sold - there is NO gain recognized - and there is no depreciation recapture - thus if the property simply changed from rental to personal use - there is NO tax liability. Only when the property eventually will be sold - the taxpayer will recognize the gain and a part of that gain will be attributable to the depreciation recapture.

Customer:

What do we do about the other partner that also holds title on the converted proprty, does he recapture his part of the depreciation?

Lev :

If there are two co-owners on the rental property - and one co-owner is selling his/her ownership interest - the gain or loss is determined on that half of the property - and there might be depreciation recapture - up to the amount of recognized gain.

Customer:

the original question did not send just the optional...

Customer:

ok. I misunderstood. both houses are in one name, partner did not hold title to anything but claimed his half of depreciation.

Lev :

If partner did not own the property - he/she may NOT claim the depreciation.
The taxpayer may only claim the depreciation on the property that is owned by that taxpayer.

Lev :

See here - http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/A-Brief-Overview-of-Depreciation
In order for a taxpayer to be allowed a depreciation deduction for a property, the property must meet all the following requirements:
The taxpayer must own the property. Taxpayers may also depreciate any capital improvements for property the taxpayer leases.


•A taxpayer must use the property in business or in an income-producing activity. If a taxpayer uses a property for business and for personal purposes, the taxpayer can only deduct depreciation based only on the business use of that property.


•The property must have a determinable useful life of more than one year.
As we see - the ownership is required to claim depreciation deduction.

Customer:

rent man is reading response...please stand by

Lev :

sure - take your time...

Customer:

owner thinks if he satisfies the 2 out of 5 rule on the property that he converted to personal use, he will not have to recapture depreciation.

Customer:

ever

Customer:

this house was a rental for 18 years prior and depreciation was claimed all 18 years

Lev :

That might be not correct
1. There is no taxable gain and there is no depreciation recapture if the property is not sold.
2. if the property is owned and used as a primary residence at least 2 out of 5 years before the sale - the taxpayer may exclude the capital gain from taxable income (up to $250k) - but depreciation recapture is not treated as a capital gain - and may not be excluded.
3. rental is considered a "nonqualified use" - see page 15 here - http://www.irs.gov/pub/irs-pdf/p523.pdf - that is a new law after 2009. so to fully exclude the capital gain after conversion - the property must not have nonqualified use during last 5 years before the sale - otherwise the gain will be partially excluded.

Customer:

ok. I think we understand now.

Customer:

Thank you for your time

Lev :

You are welcome. I will appreciate if you take you time to rate my work.
My goal is to provide EXCELLENT service.
You may come late to this page if you need any clarification - I will address all your concerns.

Lev and 2 other Tax Specialists are ready to help you

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