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03-22-2014, 11:53 AM
 Junior Member Join Date: Mar 2014 Posts: 2
Depreciation Basis - Orig price or FMV at time converted to rental?

I'm so confused. Which value do we use for rental depreciation? We lived in the home for 20 years then converted it to a rental 2013.

Fair market value at time converted to rental was about \$550,000

-OR-

\$92,270

Based on (things we have receipts for)
Orig purchase 1993 = \$225,000
Land value 1993 \$152,730
Net \$72,270 structure value
+ Improvements = Remodeled kitchen 2011 \$15,000 and Remodeled Bath 2013 \$5000
72,270+15,000+5000

03-22-2014, 05:52 PM
 Moderator Join Date: Oct 2010 Posts: 5,183
Quote:
 Originally Posted by shoe I'm so confused. Which value do we use for rental depreciation? We lived in the home for 20 years then converted it to a rental 2013. Fair market value at time converted to rental was about \$550,000 -OR- \$92,270 Based on (things we have receipts for) Orig purchase 1993 = \$225,000 Land value 1993 \$152,730 Net \$72,270 structure value + Improvements = Remodeled kitchen 2011 \$15,000 and Remodeled Bath 2013 \$5000 72,270+15,000+5000
When the property is converted the basis for depreciation is the lower of the adjusted basis on the date of conversion or the FMV of the property at the time of conversion. Generally the basis is the cost of the property plus the amounts paid for capital improvements, less any depreciation and casualty losses claimed for the tax purposes. The property must be depreciated using the method and recovery period in effect in the year of conversion. For 2014 the recovery period is 27.5 years.so your adj basis is \$92,270 and its fmv is \$550k, so its depreciable basis is \$92270.however, wn ou dispose of h eptthen youmust recapture the unrecap depre taxed at 25% sec 1250 rule as ordinary income on your return.

03-23-2014, 11:02 AM
 Junior Member Join Date: Mar 2014 Posts: 2
Thank you

Thanks. So in theory (or practicality) using a lower depreciation now means less write off now, but less taxes when we sell in 5-10 years.

What's sad is that my realtor (family) told me to use the FMV "as he always does" which likely would have gotten us in trouble with the IRS, as well as giving us a potential huge tax hit if we sold the rental 10 years down the road after depreciating it at \$550,000.

03-23-2014, 11:23 AM
 Moderator Join Date: Oct 2010 Posts: 5,183
Quote:
 Originally Posted by shoe #1;Thanks. So in theory (or practicality) using a lower depreciation now means less write off now, but less taxes when we sell in 5-10 years. #2;What's sad is that my realtor (family) told me to use the FMV "as he always does" which likely would have gotten us in trouble with the IRS, as well as giving us a potential huge tax hit if we sold the rental 10 years down the road after depreciating it at \$550,000.
#1;Correct; lower depre means less write off a year and higher taxes but less taxes when you sell in the future;howevr, you need to use MACRS depre method ; you need to depreciate the rental home for 27.5 years by determining the rental property's building value. Land isn't depreciated.You need to apply the current "useful life" value as stated by the IRS. As of Jan 2011, the IRS states that rental property has a useful life of 27.5 years.

04-08-2014, 04:07 PM
 Junior Member Join Date: Apr 2014 Posts: 4
#1;Thanks. So in theory (or practicality) using a lower depreciation now means less write off now, but less taxes when we sell in 5-10 years.

Can I ask about this comment? I don't think using lower depreciation now means less taxes at the sale. If you compute a lower depreciation by using a lower adjusted basis, then your capital gain on sale would be higher, probably more than offsetting the tax savings from a lowere depreciation recapture. Am I understanding this correctly?

04-08-2014, 06:04 PM
 Moderator Join Date: Oct 2010 Posts: 5,183
Quote:
 Originally Posted by jmleinenbach #1;So in theory (or practicality) using a lower depreciation now means less write off now, but less taxes when we sell in 5-10 years. #2;Can I ask about this comment? I don't think using lower depreciation now means less taxes at the sale. If you compute a lower depreciation by using a lower adjusted basis, then your capital gain on sale would be higher, probably more than offsetting the tax savings from a lowere depreciation recapture. Am I understanding this correctly?
#1;basically depreciation reduces your basis for figuring gain or loss on a later sale or exchange.lower depre now means lower write off now and MORE taxes as you deduct less from your current taxable rental income it means lower taxes( sec 1250 depreciaiton amount is lower) when you sell it 5~10 years;however,REMEMER THIS: there is no lower depre ;Generally, you must use the MACRS to depreciate residential rental property placed in service after 1986. If you placed rental property in service before 1987, you are using one of the following methods. Accelerated Cost Recovery System for property placed in service after 1980 but before 1987 OR Straight line or declining balance method over the useful life of property placed in service before 1981.so there'd be lower depre aslongas you bought it before 1987.However, once you bought it after 1986, you need to apply MACRS on the pty so no lower depr.

#2;I mean using a lower adj basis means more LTCG when you dispose of it however, you still need to recapture unrecaptured r/e depre taxed at 25% as ordinary income this also means lower adj bais generated higher LTCG and you need to recapture so called sec 1250 depre, ordinary income, when you dispose of the pty

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