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Old 01-27-2013, 03:36 PM
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Rented, then personal use, now renting out again

What a great forum. I've seen some questions on close to mine, but not exactly. I'm using TurboTax Premier but the Step by Step method does not seem to be asking the right questions.

We bought a small home for $42,500 in June, 1988 for my mother-in-law to move into. Land was valued by PVA at the time at aprox. $4000.

Until July, 1990 when she moved in, we rented the house to tenants, declaring rental income and claiming expenses and depreciation on 1988,1989 and 1990 taxes. (Hopefully, my packrat tendencies will allow be to locate those returns in the "safe" place I'm sure I stored them).

From July 1990 until March 2012 when my MIL passed away, she lived in the house rent free. She did pay for utilities and occasional plumbing repair. She also bought her appliances. According to 2012 PVA, house is now assessed at $70,820 and land at $35,000. FMV for both is probably around $125,000.

Since May, in preparation for renting, we've spent around $15,000 fixing the house up and started renting it in November, 2012. We received one rent payment in 2012 for $600. Tenant is paying utilities. The rent is close to the median rent in our area per TurboTax.

Couple of questions: Since we're apparently limited in how much of the fix-up costs we can write off, are those costs added to the basis for when we eventually sell? They included waterproofing the basement, redoing hardwood floors, some electric and plumbing rehabs, couple of new toilets, etc.

Secondly, and the main reason I'm writing: How does depreciation factor in to our 2012 taxes? The TurboTax questions don't seem to provide a means to acknowledge the depreciation claimed in 1988-1990, the personal use since then, and the means to start claiming it again.

And, is depreciation to be claimed limited by the amount of rental income declared?

Is the FMV of the house of any relevance at this point since we've owned the house continuously since 1988?

This may be an occasion where I must leave the step-by-step method and go directly to the IRS forms so if you can point me to the forms and publications I need to review, I'll be most grateful.

Thank you.



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Old 01-27-2013, 06:15 PM
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“Until July, 1990 when she moved in, we rented the house to tenants, declaring rental income and claiming expenses and depreciation on 1988,1989 and 1990 taxes. (Hopefully, my packrat tendencies will allow be to locate those returns in the "safe" place I'm sure I stored them).”======>ASO you , on he sale of th e pty in the future, MUST recapture the unrcaptured depre on yur return as ordinary income. A special 25% tax rate applies to real pty gains attributable to depre previously taken and not already recaptured under the Sec 1245 or Sec 1250 rules.When your ordinary tax rate is only10 or 15% to the extent of the remaining amount in the 10 or 15% bracket and ten 25%.

“From July 1990 until March 2012 when my MIL passed away, she lived in the house rent free. She did pay for utilities and occasional plumbing repair.”====>. There are special provisions for providing housing for elderly, dependent parents. And if you require a person to live on the property in order to perform their job duties (on-site management of rental properties, caretakers, etc), it is non-taxable to the person performing their duties. So if they are maintaining the property, showing it to prospective tenants or buyers, "staging" the property for sale/rent, it is "for the employer's convenience" and not taxable..Otherwise, you must charge fair-market rent (taxable income to you) as long as the fair mkt rental exceeds $13K for 2012, you must file Form 709.
She also bought her appliances. According to 2012 PVA, house is now assessed at $70,820 and land at $35,000. FMV for both is probably around $125,000.

“Since May, in preparation for renting, we've spent around $15,000 fixing the house up and started renting it in November, 2012.”======> An important part of the ownership of a home is the preparation for its eventual sale. A good example of this is maintaining records of any capital improvements that you make to the house, since the value of these add to the basis of your pty.

“Couple of questions: Since we're apparently limited in how much of the fix-up costs we can write off, are those costs added to the basis for when we eventually sell? =========>.Correct;UNLESS they are repairs costs. Unlike repairs made to your personal residence, rental pty repair costs that are incurred to place the property in rentable condition or to maintain it are deductible on Sch E of 1040 tax return.
“They included waterproofing the basement, redoing hardwood floors, some electric and plumbing rehabs, couple of new toilets, etc.”===>As described above.

“Secondly, and the main reason I'm writing: How does depreciation factor in to our 2012 taxes? The TurboTax questions don't seem to provide a means to acknowledge the depreciation claimed in 1988-1990, the personal use since then, and the means to start claiming it again.”===>UNLESS you dispose of the residence , you do not need to recapture unrecatured depre taken previously, however, unless the residence iis no longer rental pty, you can’t deduct depre on Sch E any longer.However, as you said, you in preparation for renting, you've spent around $15,000 fixing the house up and started renting it in November, 2012. The IRS imposes various rules that determine whether you can claim a deduction including depre exp for rental expenses when you have no rental income, or when the expenses exceed your rental income. Before you claim expenses under either scenario, ensure that at-risk and passive activity rules don't limit the detectability of your expenses. Unless you actively engage in rental activities, the IRS considers rental real estate a passive activity. When you calculate your income tax at the end of the year, you must separate your passive activities from your non-passive activities, such as employment income. The significance of this allocation is that you can deduct only expenses for passive activities against income from passive activities. Therefore, if you have no other passive income, you cannot deduct your rental expenses without any rental income. For example, suppose you have two rental properties with total rental income of $15K and combined expenses of $20K. In this scenario, $5K is not deductible since you have insufficient passive income to deduct it from. Or rental properties are a source of income for landlords and, as such, they also generate income tax deductions. When a rental property is vacant, a landlord remains able to claim deductions despite the loss of rental income.



“And, is depreciation to be claimed limited by the amount of rental income declared?’=====>Correct UNLESS you are a r/e pro or actively participate in the rental pty mgmt. As said above.

“Is the FMV of the house of any relevance at this point since we've owned the house continuously since 1988?”======>In my opinion, it depends on the situation;basically, the basis of a rental property is the value of the property that is used to calculate your depreciation deduction on your federal income taxes. The IRS defines the tax basis of a rental property as the LOWER of FMV or the adjusted basis of the property. So, you can calculate the tax basis of a rental property by calculating the FMV of the property and then comparing it to the adjusted basis of the property.If the FMV of the home at the time it was converted to rental pty was LESS than its Adj basis , then yo must calculate an Adj basis for gains and FMV for losses when you dispose of the pty. Although tax rules allow sellers to avoid taxes on $250K ($500K if you're married and file joint return) of home-sale profit, you must know how to compute your personal residence's basis before you can calculate any gain or loss. Home improvements are the most common increase that occurs to a home's basis. There are limits on what the IRS considers an improvement. An improvement must accomplish one of the following three goals: Materially add to the value of your home, Considerably prolong its useful life, or Adapt it to new uses.Please visit the IRS webpage for more info in detail here; Publication 523 (2011), Selling Your Home



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