Rental property converted to primary home and mixed-use rental

[MikeB_CPA]

A client had a second home that was a rental property.  During 2024 the rental property activities ceased, and that home is now his primary (and only) home.  I stopped all depreciation on the rental property as of the date the rentals ceased in 2024, and we are carrying forward passive losses. 

However, the client is now contemplating renting the home (his primary home) for more than 15 days each year, starting in 2025.  I understand the need to allocate expenses between the personal and rental portions of a mixed-use property.  However, I am totally stumped as to how to depreciate a mixed use property such as this.  Do I continue to depreciate the property as if it had continued to be a rental, and just change the business percentage use each year?  Or, do I set up new depreciable assets for the mixed use property?  I don't know how to transition from the rental property depreciable assets to depreciable assets for the new mixed-use rental.

Any guidance will be appreciated.  Thanks!

[TaxGuyBill · Accepted solution]

Yes, all assets are depreciated using the current-year percentage.

As for this transition and whether you continue to use the existing assets or start new ones, that is a bit tricky.  You need to determine if (a) it was converted to personal use.  Then as a later event, it was placed in service again, or (b) it went from a rental to mixed-use.

The other way around, going from mixed-use to 100% rental is determined if the 100% rental is expected to be for one year or more.  Based on that, it could be reasonable that (a) if the personal-only use was more than one year, it would be considered as converted to personal use or (b) if the personal-only use was less than one year, it went directly to mixed-use.

As for your question, if it went from rental to mixed-use, continue to depreciate the existing assets.

If it went from rental to personal use, then later placed in service as a mixed-use, restart depreciation using new asset sheets, using (1) the new placed in service date and (2) for the Basis, use the lower of (a) Adjusted Basis or (b) the Fair Market Value on date of conversion.

[MikeB_CPA]

Thanks very much for such a thorough reply.  You have confirmed my thoughts on continuing depreciation on the assets since essentially this property is going from rental property to mixed-use, without an intervening period of personal use.  Very appreciative of the insights and guidance!