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.