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Old 02-04-2013, 09:55 PM
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Rental Property Cost Basis

Hello,

During 2012 I had no intention of buying another home; however, my wife and I came across a great deal on another home in our same neighborhood so we decided to buy it and rent our old home. We purchased the new home in Aug and had the old home rented by the end of Sep. Before we rented it we put in an updated bathroom along with all the cleaning and painting.

Now at tax time I need to determine the cost basis of my old home which was converted to rental property late in the year. We owned and lived in the old home for over over 5 years so I assume I cannot use the purchase price as the cost basis?

I am trying to figure out what the cost basis should be on my rental. We had the house appraised in early 2012 because we thought we might try to sell it. The appraisal came back about $20,000 less than what we currently owe on it. So, do I have to use the appraisal as the cost basis or can I use the amount that we still owed on our mortgage at the time we rented the house?

Also, can I add in the expense we had from painting and updating the bathroom before we rented it? Along those lines, as I mentioned above we started the year with no intention of making any changes to our living arrangement. In early 2012 we had a brand new HVAC system installed (including AC which the home previously did not have). During that time we also installed a new water heater. We made all these improvements and more with the intent of staying in the home. So my question is, can I add these expenses to the cost basis of our home now that it has been converted to rental property?

Thank you for your guidance



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Old 02-05-2013, 10:06 AM
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“Now at tax time I need to determine the cost basis of my old home which was converted to rental property late in the year. We owned and lived in the old home for over over 5 years so I assume I cannot use the purchase price as the cost basis? “=========>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. 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.

“I am trying to figure out what the cost basis should be on my rental. We had the house appraised in early 2012 because we thought we might try to sell it. The appraisal came back about $20,000 less than what we currently owe on it. So, do I have to use the appraisal as the cost basis or can I use the amount that we still owed on our mortgage at the time we rented the house?”===>As sadi above your cost basis is LOWER of the FMV or adj basis of the old pty converted to rental pty.

“Also, can I add in the expense we had from painting and updating the bathroom before we rented it? “.====>Yo can deduct yur paiting costws on Sch E of 1040 as rental pty opeartign exp; Unlike repairs made to your personal residence, rental property repair costs that are incurred to place the property in rentable condition or to maintain it are deductible on Sch E of your personal 1040 tax return. In the case of costs for updating your bathroom, it needs to be added to the basis of the pty and needs to be depreciated as part of the pty for 271/2 years.

“Along those lines, as I mentioned above we started the year with no intention of making any changes to our living arrangement. In early 2012 we had a brand new HVAC system installed (including AC which the home previously did not have). During that time we also installed a new water heater. We made all these improvements and more with the intent of staying in the home.”=====>ou need to deprecaite those costs for 271/2 o SCh E; Capital expenditures, as aid previously, are different. Rather than allowingyou to immediately deduct the full amount of capital expenditures, the IRS requires them to spread deductions over multiple years to span the useful life of the piece of property. You can amortize certain aspects of the cost of your rental property

“So my question is, can I add these expenses to the cost basis of our home now that it has been converted to rental property?”=======>correct as aif above; also remember as logn as yu converted it to rental pty when you dispose of it as rental pty(or as residence) in the future you must recapture unrecaptured depreciation take previously on your return and pay the ordinary income tax of 25% on the recaptured depre.



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Old 02-05-2013, 03:30 PM
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RE

Thank you for your reply.

So let me see if I got this straight. The appraisal would count as an estimate of FMV for my rental property? Then, if I calculate what I still owe on my mortgage and add back the upgrades to the property that would be the adjusted basis?

I would then have to use the "lesser" of the two as my cost basis?



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Old 02-05-2013, 03:47 PM
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" . The appraisal would count as an estimate of FMV for my rental property?"=> In general as far as I know correct.

"if I calculate what I still owe on my mortgage and add back the upgrades to the property that would be the adjusted basis?"=======>as said previously you need to add capital expenditure costs that increase deprerciable llife of yur rental pty.


"I would then have to use the "lesser" of the two as my cost basis? "=======>correct you need to choose the lower of FMV or the adjusted basis of the property in 2012 when you converted it to rental purposes



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