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Property rental and figuring out depreciation
Old 12-05-2017, 10:17 AM   #1
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Property rental and figuring out depreciation

I've been renting out my house this year and now I'm trying to determine depreciation for tax time.

HR Block program tells me to use the original cost of the house and then subtract the land value at the time. I know what I paid for the house 20 years ago but no idea of the land value. Any one have experience with this?

I can look at my property tax as that separates them out but that is obviously a lot more than the original value.
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Old 12-05-2017, 10:38 AM   #2
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Perhaps the property tax people have records for years past and can tell you what value they put on the land and buildings the year you bought it.
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Old 12-05-2017, 10:43 AM   #3
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You should be able to go to the county assessor's website and look at historical records as to what the land and building value was assessed at. Some counties make you pay to access this data but most don't. If they do make you pay, it is normally not expensive.
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Old 12-05-2017, 10:55 AM   #4
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Do not make this too difficult.

Look at the current land value compared to the current property value. Get the ratio and apply it to the past cost of the home. It will be close enough.

You do not need to be exact. You just need a good explanation/method of what/why you choose it.

In a normal rental, you would also split off the appliances and other fixtures and depreciate them over 5 years, not 27.5. It also lowers the cost of depreciation recapture at some point, as you depreciate of the building.

Total Value (House, land, fixtures) $200K
Land $40K
Fixtures, $15K

You depreciate $15K over 5 years and $145K over 27.5 years.
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Old 12-05-2017, 11:00 AM   #5
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+1 I think the best thing to do would be to get the appraised value in the year you bought it (or some year close) and look at the land value as a percentage of the total appraised value and apply that land value percentage to what you paid for the property. If that info isn't available then either get as close as you can or use the current appraisal values.
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Old 12-05-2017, 11:40 AM   #6
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It's not really that simple

It's a choice between the Fair Market Value when you changed it's use, vs original cost of building + improvements - cost

"
Property Changed to Business or Rental Use

If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. An example of changing property held for personal use to business use would be renting out your former main home.
Basis for depreciation.
The basis for depreciation is the lesser of the following amounts.
  • The FMV of the property on the date of the change, or
  • Your adjusted basis on the date of the change."
Search for some of the quoted stuff in the link below and you will see an example.


https://www.irs.gov/publications/p55...link1000257022
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Old 12-05-2017, 12:13 PM   #7
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Quote:
Originally Posted by Sunset View Post
It's not really that simple

It's a choice between the Fair Market Value when you changed it's use, vs original cost of building + improvements - cost

"
Property Changed to Business or Rental Use

If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. An example of changing property held for personal use to business use would be renting out your former main home.
Basis for depreciation.
The basis for depreciation is the lesser of the following amounts.
  • The FMV of the property on the date of the change, or
  • Your adjusted basis on the date of the change."
Search for some of the quoted stuff in the link below and you will see an example.


https://www.irs.gov/publications/p55...link1000257022

Great point, it can be either the original cost or the current value. Assuming there is a range for the current value, most tax-savvy landlords would pick the higher end of the range of the current value. That would have a tendency to minimize capital gains in the future and maximize the depreciation deductions. Then split off fixtures and land.
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Old 12-05-2017, 12:17 PM   #8
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Originally Posted by Senator View Post
Do not make this too difficult.

Look at the current land value compared to the current property value. Get the ratio and apply it to the past cost of the home. It will be close enough.

You do not need to be exact. You just need a good explanation/method of what/why you choose it.

In a normal rental, you would also split off the appliances and other fixtures and depreciate them over 5 years, not 27.5. It also lowers the cost of depreciation recapture at some point, as you depreciate of the building.

Total Value (House, land, fixtures) $200K
Land $40K
Fixtures, $15K

You depreciate $15K over 5 years and $145K over 27.5 years.
+1. Keep it simple. My advice. Appears you are new to the game. Find a good CPA. Have them do your tax return this year. Ask them to explain how depreciation works. Different items are depreciated for different lengths of time.

Using H/R block, (which I use), the rental portion is very confusing. When I do my income tax, with H/R block, when I fill in the Rental portion of my
income tax. I skip the H/R questions. I go directly to the forms, override
the entries, and fill in the correct numbers.

Good luck.

PS. You may find it easier to pay a CPA. Can be expensive. Here in San Francisco Bay Area, CA
$450-$500. That was a couple of years ago.
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Old 12-05-2017, 12:37 PM   #9
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There is a website called zillow that will give you a good estimate of the value. Look at your last tax bill that breaks out the land and house value. Use that same ratio on the present value.
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Old 12-05-2017, 02:01 PM   #10
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Quote:
Originally Posted by Sunset View Post
....It's a choice between the Fair Market Value when you changed it's use, vs original cost of building + improvements - cost
....
Good point.... if OP goes with FMV he could uses the current tax appaisal allocation of land/buildings as a guideline.

But OP, just be aware... it is tempting to chose FMV assuming the property has depreciated so you get a bigger depreciation deduction but if/when you sell there is depreciation recapture that is taxed at 25% (even if you did not claim that depreciation).
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Old 12-05-2017, 02:29 PM   #11
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Originally Posted by pb4uski View Post
Good point.... if OP goes with FMV he could uses the current tax appaisal allocation of land/buildings as a guideline.

But OP, just be aware... it is tempting to chose FMV assuming the property has depreciated so you get a bigger depreciation deduction but if/when you sell there is depreciation recapture that is taxed at 25% (even if you did not claim that depreciation).
I think, and my accountant has explained to me, the depreciation recapture is at your ordinary income tax rate, not necessarily 25%. It will have a maximum of 25%.

This article confirms it too. For many people, it will be 25%, just not the first few dollars.

Quote:
The depreciation recapture portion of your capital gain is taxed at your ordinary tax rate, not the capital gains rate.
Quote:
The lower of the two figures is the amount the IRS considers subject to depreciation recapture at your ordinary income tax rate
https://www.kiplinger.com/article/in...nsequence.html
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Old 12-05-2017, 04:18 PM   #12
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Good to know... I read 25% in some places and ordinary rates in other places.
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Caution Depreciating Your home
Old 12-05-2017, 06:26 PM   #13
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Caution Depreciating Your home

Caution...

When you have lived in your home for 20 years and then change the use to rental after your 3rd year you will lose the tax free gain on the sale of your home...

This could amount to some serious money.
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Old 12-05-2017, 06:39 PM   #14
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Originally Posted by pb4uski View Post
Good to know... I read 25% in some places and ordinary rates in other places.
It's a special CG rate... in effect, your ordinary rate, not to exceed 25%. It wouldn't make sense to recapture at 25% for someone in the 15% or 10% ordinary income bracket.

I sold a rental this year that I owned for 3 years. We had a fairly large gain for such a short period but obviously not a ton of recapture. After spending many hours working through TurboTax and studying the resulting Schedule D tax worksheet, the recapture will be taxed entirely at 15% since it "fit" within the 15% bracket. The rest of the house gain plus our other QDs and CGs are taxed at a mix of 0% and 15%, the latter rate for that portion which exceeded the top of the 15% bracket.
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Old 12-05-2017, 06:43 PM   #15
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Caution...

When you have lived in your home for 20 years and then change the use to rental after your 3rd year you will lose the tax free gain on the sale of your home...

This could amount to some serious money.
You still get the tax free gain, except it's prorated. If you own a place for 20 years, and rent it for two years, you get to take 20/22 of the gain.

If you rent it for five years, you are SOL, as you did not live in it for 2 of the past five years.

The same thing in reverse. Rent a place and move into it, you eliminate a lot of taxes on gains.

Thats the way I understand it.
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Old 12-05-2017, 07:01 PM   #16
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BTW there are some repairs that whose value would as I understand it be added to the basis, such as a new roof.
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Old 12-06-2017, 08:09 AM   #17
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Quote:
Originally Posted by Sunset View Post
It's not really that simple

It's a choice between the Fair Market Value when you changed it's use, vs original cost of building + improvements - cost

"
Property Changed to Business or Rental Use

If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. An example of changing property held for personal use to business use would be renting out your former main home.
Basis for depreciation.
The basis for depreciation is the lesser of the following amounts.
  • The FMV of the property on the date of the change, or
  • Your adjusted basis on the date of the change."
Search for some of the quoted stuff in the link below and you will see an example.


https://www.irs.gov/publications/p55...link1000257022
That example was a great help. Thank you.

Thanks everyone!

Since my FMV is about 3x my adjusted basis I will be using the latter.

I will use the present ratio of land/building on my last property tax bill to figure out percentage to subtract for land on the date I bought the house.

H&R is whacked out on this. Nothing made sense and I even paid a whole extra $10 for the premium edition
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Old 12-06-2017, 11:53 AM   #18
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