Welcome Guest. Register Now!  



Reply
 
LinkBack Thread Tools Search this Thread Display Modes
  #1 (permalink)  
Old 03-31-2012, 02:34 PM
Junior Member
 
Join Date: Mar 2012
Posts: 2
Conversion to Rental Property - Tax Basis

When converting a property from personal use to a rental property, I understand you use the lesser of the adjusted basis (AB) or FMV. I've looked at comparable sales in the neighborhood at around the time of conversion. However, what is the best way to determine what portion of the AB or FMV is depreciable, i.e. non-land.

Would it be acceptable to use the "replacement cost" of the dwelling as outlined in my hazard insurance policy, as this value does not include land?

Thanks



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #2 (permalink)  
Old 04-02-2012, 06:56 PM
Moderator
 
Join Date: Oct 2010
Posts: 5,236
“When converting a property from personal use to a rental property, I understand you use the lesser of the adjusted basis (AB) or FMV.”----> Correct. For depreciation purposes: Lower of: value at date of conversion, FMV,or AB as you said.
“I've looked at comparable sales in the neighborhood at around the time of conversion. However, what is the best way to determine what portion of the AB or FMV is depreciable, i.e. non-land.”---->FMV in general value determined by a professional appraiser) is ,according to the IRS, FMV is "the price the property would sell for on the open market. The figure has also been described as the price between a willing buyer and a willing seller" who both know about the usefulness and condition of the item. AB is your original basis in your home depends on how you acquired it. If you purchased your home, the basis is its cost. If you built it, the basis is the cost of construction. If you acquired your home by inheritance or gift, the basis is either the fair market value of the home when you got it, or the adjusted basis for the person from whom you received the home. While you owned the home, you may have made additions or improvements that are treated as increases in your basis, or you may have casualty losses, depreciation, if you used part of your home for business purposes, or other items that decrease the basis. These increases and decreases are added to or subtracted from your original basis in arriving at your adjusted basis.
“Would it be acceptable to use the "replacement cost" of the dwelling as outlined in my hazard insurance policy, as this value does not include land?”----> Market value is the price paid for your house. Replacement cost is the price or cost it will take to rebuild your house in the same spot, same size and same quality of construction, at today's costs. Insurance companies use the replacement cost valuation. These can be two completely different numbers.For example, a home purchased in a depressed city neighborhood, may have a market value of $120,000. The exact house, located in a nice suburb, may have a market price of $285,000; however, the cost to rebuild the house after a loss would be the same in either location. The insurance company is looking to insure the home for the full replacement value, not the current market value. Remember, they are going to pay to build you a new home, not buy one for you down the street. So, for your residence converted into rental property, its basis is either the lesser of FMV at date of conversion OR AB of the property at date of conversion.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #3 (permalink)  
Old 04-02-2012, 07:22 PM
Junior Member
 
Join Date: Mar 2012
Posts: 2
Thanks for the feedback.

Using several comparables I have a FMV at the date of conversion. What I don't have is a value for the land.

So it appears the only way to value the land is through a professional appraisal. Assuming the FMV that I assign the property on date of conversion is held up under a potential audit, the only risk is allocating the wrong value to the land. If under audit it's determined too little value is allocated to land, I run the risk of the depreciation deductions being reduced. However, this will result in less capital gain when sold. If under audit it's determined too much value is allocated to land, I would be entitled to larger depreciation deductions, but a larger capital gain upon sale. Please confirm if my reasoning is correct.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #4 (permalink)  
Old 04-02-2012, 07:59 PM
Moderator
 
Join Date: Oct 2010
Posts: 5,236
“So it appears the only way to value the land is through a professional appraisal.”---> I guess so.
Assuming the FMV that I assign the property on date of conversion is held up under a potential audit, the only risk is allocating the wrong value to the land. If under audit it's determined too little value is allocated to land, I run the risk of the depreciation deductions being reduced. “--->Correct. Then, your unrercaptured depreciation amount, I mean , unrecaptured r/e depreciation subject to 25% ordinary income tax rate, is ALSO overstated, meaning higher ordinary income tax liability on the LTCG due to understatement of land value and overstatement of depreciable building value. And your LTCG , on the sale of home converted into rental pty is understated ( as your pty is depreciated more due to overstatement of depreciable b/d) value. So, you need to pay more unrecaptured depre on r/e, 25% rate ;However, your ordinary tax rate is 10 or 15%, then the depre recap will be taxed at 10 or 15% , NOT 25%.
“However, this will result in less capital gain when sold. “------>Overstatement of depreciable b/d( I mean understatement of land value) is less LTCG and more unrecap depre ordinary income tax; understatement of depreciable b/d means More LTCG. less unreacpr depre ordinary income tax.
“If under audit it's determined too much value is allocated to land, I would be entitled to larger depreciation deductions, but a larger capital gain upon sale. Please confirm if my reasoning is correct.”---->Then, as said above, understatement of depreciable b/d means a larger LTCG. less unreacpr depre ordinary income tax.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
Ads
Reply


Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

vB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Rental property basis in my estate rocketman7777 Estate Planning 10 06-15-2016 12:25 AM
Basis of rental property youtubethis10 Rental Real-Estate 4 11-15-2011 12:36 PM
Can Suspended Losses from Rental Property converted to Personal Residence be released upon sale of another rental property? mountainaire Rental Real-Estate 1 04-05-2011 03:59 AM
Rental Property Cost Basis and Depreciation Courtley Rental Real-Estate 0 02-27-2011 01:45 PM
Property Rental conversion to Primary Residence and Back to Rental Property jgmeyer Rental Real-Estate 1 01-03-2011 08:47 AM

Follow us on Facebook Follow us on Twitter Google Buzz Rss Feeds

» Categories
 
Individual
 » Income
 » IRA/Sep
 » Medical
 
Corporations
 » Payroll
 
Forum for CPAs
 
Financial Planning