1

I bought a second house with the intention of fixing it up and then renting it.

  • I have been working on it for almost three years and for the last two year
  • I have been depreciating it on tax forms and adding the cost of the various builders (plumbers, roofers, etc.)
  • I did not need to show any rental for the first three years of ownership per IRS rules (I believe).

Now in its third year I have changed my mind and have decided to live there.

Questions:

  1. How will the IRS view my previous two years of build out costs and the depreciation that I have taken?
  2. If say the house cost $200,000 and I have put $50,000 into it what will be the base price from which I ultimately sell it in the distant future?
|improve this question
1

I did not need to show any rental for the first three years of ownership per irs rules (I believe).

Why did you believe that?

How will the irs view my previous two years of build out costs and the depreciation that I have taken?

The same way as they would had you started renting it. Disallow it entirely and charge you with interest and penalties.

If say the house cost $200,000 and I have put $50,000 into it what will be the base price from which I ultimately sell it in the distant future?

Who knows? When that future comes, you'll need to do the calculation. In the mean time keep all the documentation for all the moneys spent and how they were spent.

|improve this answer
  • I believed that the IRS does not need to see income coming from a rental property for the first three years of ownership when work is being done on it to make it occupiable. Beyond that the IRS might question lack of any income. This was from an accountant - perhaps he was wrong - I can't find anything in IRS publications – peter Clarke Jul 19 '16 at 21:41
  • 1
    @peterClarke that is incorrect. You cannot have rental expenses before the unit is first available for rent. You capitalize all your expenses for repair/remodel and only start depreciating once it's on the market available for rent. – littleadv Jul 20 '16 at 4:31
  • This answer is correct. Depreciation and tax write-off begins the day it's "put into use" as a rental. Typically, the day it's ready to rent and you advertise that fact, or list with a rental agent. – JoeTaxpayer♦ Dec 2 '16 at 10:41

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .