[khw]

We have a studio in our back yard that we rent out to artists as a workshop. I discovered last year, and it was confirmed by this forum (thank you very much) that I had been given incorrect advice by an accountant when we first started renting in late 1997 to not take depreciation. So now, I'm going to file amended returns for the maximum allowed past three years.

But there are a couple of issues. First, if I use ADS to depreciate, I will have lost less than with GDS, since the depreciation interval under ADS is 40 years vs 27.5 (we treat this as residential). I use TurboTax, and it appears that the program sent this as GDS to the IRS in '97. It looks like I would have to file form 3115 to change to ADS. Question#1: Is this true? Q#2: Would the IRS likely grant permission, and in time to file the oldest amended return before the expiration time of 4/15?

A complication is that the studio stood vacant from 2/1/2004 through 7/31/05, unrented and unused. The previous tenant moved out during a local economic downturn, and I tried advertising it without success into May at which time I got tired of fruitlessly paying ad fees. After that the only advertising I did was asking friends to keep me in mind if they heard of anyone looking for such a place, and mentioning it in my answering machine greeting. I intended to do some upgrades before taking out paid ads again, but did not get around to doing the work until June of '05, and that's when I discovered Craigslist. It was rented from 8/05 through 10/05, then off again for three months, then pretty much fully rented ever since. Q#3 is what affect do these periods of not being rented have on taking depreciation?

And finally, Q#4 if I convert it to personal use for an interval in the future, what effect does that have on taking depreciation?

Thanks in advance. I tried asking these questions of a local accountant acquaintance, but this is not her area of expertise, so she didn't know.

[AtlantaTaxExpert]

1) Yes. The default is ADS.

2) No idea. You would have to to justify it to the IRS.

Amend the oldest return immediately using ADS to beat the 15 April 2008 deadline for the 2004 return. After that amendment is filed, you can then amend a SECOND time for up to two years after the first amendment if the IRS aprroves the use of GDS.

3) I believe you can continue to claim the depreciation, even though your efforts to rent were lukewarm at times.

4) Once you convert to personal use, the depreciation STOPS. However, the depreciation that DID occur will reduce the basis on the property when you eventually sell it.