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I would like to know how to calculate the cost basis for a primary residence converted to a rental property.

I purchased the home in Oregon for 200k in 2005. I moved out and rented it in May 2013. The home is now worth approx 220k.

Do any of these factors matter in determining the cost basis for depreciation?

  • Home has had numerous upgrades while I occupied the home.
  • Do I use the original cost since, the house has appreciated?
  • Cost basis is defined as: value of the home minus the value of the land, correct? Must I get this from my county property tax statement from 2005 (I cannot locate it, so will need to request it).
  • Is it worth (the hassle) factoring in appliance upgrades? Can this be done?
  • Any other factors to consider?

Thanks!

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*Disclaimer: I am a tax accountant , but I am not your professional accountant or advocate (unless you have been in my office and signed a contract). This communication is not intended as tax advice, and no tax accountant / client relationship results. *Please consult your own tax accountant for tax advise.**

Lets use this example to answer your question.

You convert your personal residence to rental property in MAY 2013. The house originally cost $ 200,000 in 2005 when you bought it. Due to upgrade and major improvements, your cost basis has risen to 250k. Your FMV is 220k, when it was converted to a rental.

1.Under the special rule, the initial tax basis of the building portion of the property for purposes of calculating depreciation write-offs equals the lower of: (1) the building’s fair market value (FMV) on the conversion date or (2) the building’s “regular basis” on the conversion date. Regular basis usually equals original cost plus the cost of any improvements (not counting normal repairs and maintenance). In this case, you would choose the FMV since its lower than your Cost Basis

2.•Cost basis is defined as: value of the home minus the value of the land, correct? Yes, you're correct!

  1. Appliance upgrade can be factored into your cost basis if you don't consider it to be a normal repair or maintenance.
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Home has had numerous upgrades while I occupied the home.

There's a thin line between "upgrades" and "repairs", which the IRS tends to challenge. Upgrades do add to the basis, repairs do not. Talk to a licensed EA/CPA to decide which is which in your case.

Do I use the original cost since, the house has appreciated?

Yes.

Cost basis is defined as: value of the home minus the value of the land, correct? Must I get this from my county property tax statement from 2005 (I cannot locate it, so will need to request it).

There are many ways, talk to a tax adviser for best results. Generally tax assessment is considered reliable, but you can use an appraisal instead.

Is it worth (the hassle) factoring in appliance upgrades? Can this be done?

Appliances installed before converting to rental are generally depreciated with the whole building (i.e.: 27.5 years). I'd say not worth the hassle.

Any other factors to consider?

I suggest talking to a licensed tax adviser (EA/CPA licensed in your State). 15 minutes could save you hundreds of dollars.

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