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Old 02-16-2013, 01:29 AM
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Rental property depreciation for prior years

We purchased our primary home in Nov 2007. The house has an in-law apartment which we personally used when we moved in.

In July 2008 we converted the in-law apartment into a rental unit. The unit has only been a rental since then (no personal use). I have been reporting the income on my returns as well as taking the expense deductions for utilities, trash collection, etc. based on the square-foot percentage corresponding to the apartment (24%)

Out of ignorance however, we failed to claim the depreciation of the rental property in any of our returns from 2008-2011. We will start claiming the depreciation with the 2012 return. I understand that I can file an amended return for each of the last 3 years (i.e. 2009, 2010, 2011). Too late for 2008.

My questions are:

1. Should each amended return assume that the proper depreciation was taken starting in 2008 and work forward from there?

2. I know the cost should be the lesser of the FMV or adjusted basis when it became a rental. Is it reasonable to use a site like Zillow to get the FMV in June 2008? Zillow also has the tax assessments so I can get the ratio of structure to land to exclude the land.

Here is what I'm figuring:

Paid for house Nov 2007: $585k
Zestimate July 2008: $564k
Tax assessment 2008: $163k land (43%), $214k structure (57%)
Square footage of apartment: 24% of whole house

So, COST = $564k * 0.57 * 0.24 = $77.155k

Does this make sense? Sorry for the long post...



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Old 02-18-2013, 04:14 PM
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We purchased our primary home in Nov 2007. The house has an in-law apartment which we personally used when we moved in.In July 2008 we converted the in-law apartment into a rental unit. The unit has only been a rental since then (no personal use). I have been reporting the income on my returns as well as taking the expense deductions for utilities, trash collection, etc. based on the square-foot percentage corresponding to the apartment (24%)”=======>I guess your choice is right.An in-law apartment may provide a living space for a caretaker or may be rented to provide additional income to you. Many local or state governments have restrictions about the addition of a second apartment on your property.Anyway, you should consult your local city or county government about zoning and other restrictions, and for help with an in-law apartment.

“Out of ignorance however, we failed to claim the depreciation of the rental property in any of our returns from 2008-2011.”======> Depreciation on a rental property is not an optional deduction. If you forgot to take depreciation in a prior tax year, you must amend your tax return. Depreciation must be claimed in the year you are entitled to take it under federal law or you lose it.You can only go back and amend your returns for three years and claim the depreciation that would have been allowed. If you file every year by April 15, you can amend 2009 through 2011 by April 15, 2013.

“We will start claiming the depreciation with the 2012 return. I understand that I can file an amended return for each of the last 3 years (i.e. 2009, 2010, 2011). Too late for 2008. “===>Correct;aslo REMEMEBR: when you dispose of the pty, then you MUST recapture the unrecap depre taken previously as ordinary income taxed at 25% in general as long as your marginal tax rate is 25% or higher.
My questions are:
“1. Should each amended return assume that the proper depreciation was taken starting in 2008 and work forward from there?”========> I guess so as long as the depre began to be taken form 2008. And you lose the annual dpere for 2008.Depreciation must be claimed in the year you are entitled to take it.
“2. I know the cost should be the lesser of the FMV or adjusted basis when it became a rental.”======>Correct;your depreciable basis is the lower of FMV or Adj basis of the pty converted to rental pty. The basis of a rental property is the value of the property that is used to calculate your depreciation deduction on your federal income tax.

“ Is it reasonable to use a site like Zillow to get the FMV in June 2008? “===>I do not think so;you may hire a professional appraiser to estimate the fair market value of your property. An appraiser carefully reviews the property, whether it's a house that can affect the value. Because the appraiser's decision is an unbiased and educated estimate by an experienced professional that is based on similar sales and a detailed analysis of the property, it's often considered a very close estimate of fair market value.

“Zillow also has the tax assessments so I can get the ratio of structure to land to exclude the land.”====>I am NOT sure of it.
Here is what I'm figuring:
“Paid for house Nov 2007: $585k”====>Your basis(original cost)
“Zestimate July 2008: $564kTax assessment 2008: $163k land (43%), $214k structure (57%)”=======>$214 is only depreciable; your basis of the pty may be $333,450;$585000*57%; then your basis for derpe on the date of conversion is $214K<$333.450
Square footage of apartment: 24% of whole house”===========>Then the depre basis is the lower of 24%*$214K or 24%*$585,000
So, COST = $564k * 0.57 * 0.24 = $77.155k “=======>correct.



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Old 02-19-2013, 04:19 PM
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Wnhough, thank you very much for your reply.

As for having an appraiser calculate the FMV of the pty, are they be able to do that going back to 2008?

Having bought the house in Nov 2007 for $585k, doesn't that actually represent the FMV for Nov 2007? Given that July 2008 was only 8 months later, it seemed that the historical value of $564k that Zillow had for July 2008 made sense (housing market was declining).

As for the tax assessment of $214k + 163k, I thought that was just a way of determining the ratio of structure vs. land in order to factor the land out of the calculation. The $214k does NOT represent the FMV nor the cost of the property. It is just what the town uses to calc real estate tax, no?

So wouldn't the depre basis be the lower of:

24% * 57% * $585k (basis cost)
OR
24% * 57% * $564k (or whatever the FMV was July 2008) ?

I'm confused by this part of your reply: Then the depre basis is the lower of 24%*$214K or 24%*$585,000

Thanks again for helping me with this. I appreciate it!



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Old 02-19-2013, 04:37 PM
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“As for having an appraiser calculate the FMV of the pty, are they be able to do that going back to 2008? “=======>I have no any idea I am not a r/e appraiser;you need to contct r/e expert.

“Having bought the house in Nov 2007 for $585k, doesn't that actually represent the FMV for Nov 2007?”=====>I guess so
“ Given that July 2008 was only 8 months later, it seemed that the historical value of $564k that Zillow had for July 2008 made sense (housing market was declining). “===>You can talk to a r/e expert.

“As for the tax assessment of $214k + 163k, I thought that was just a way of determining the ratio of structure vs. land in order to factor the land out of the calculation. The $214k does NOT represent the FMV nor the cost of the property. It is just what the town uses to calc real estate tax, no?”=====>Agreed; so as said you need to contact the city jurisdiction for more accurate info in detail.

“So wouldn't the depre basis be the lower of:

24% * 57% * $585k (basis cost)
OR
24% * 57% * $564k (or whatever the FMV was July 2008) ?”====>Correct this is the depreciable basis of the improvement( of the home excl land) when you convert it to rental pty; as you can see, you can never depreciate your residence UNLESS it is used for trade/biz or investment purposes.

“I'm confused by this part of your reply: Then the depre basis is the lower of 24%*$214K or 24%*$585,000”======> The depreciable basis of the home converted to rental pty is the LOWER of the FMV or Adjusted basis of the pty.$214K is the adj basis for tax assesemnt i guess you need to find actual adj basis perhaps on yur r/e contract or etc, i guess
Please visit the IRS Webpage here formore info in detail; Publication 527 (2012), Residential Rental Property



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Old 02-19-2013, 04:42 PM
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The basis in your home originates when you acquire it. Home improvements are the most common increase that occurs to a home's basis. Items aside from improvements can increase or decrease your home's basis. Common expenditures that will increase your basis include expenditures for restoring damaged property and assessing local improvements. If you bought the home, keep the settlement statement. Home improvements that increase your home's basisAdditionsBuilt-in appliances, kitchen or bath modernization, flooring, wall-to-wall carpetingWater heaterExtra bedroom, bathroom, deck, porch, garage, patio, fireplace Landscaping, driveway, walkway, fences, pool.



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Old 03-04-2014, 12:47 PM
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Lease to own equipment.

Purchased a forklift for company use on a rent/lease to own contract. In what section and how does a lease/rent to own forklift payments/purchase need to be stated for corporate tax returns? Payments made should be recorded as rental/lease payments or purchase? If purchase the total amount need to be stated on the first year the payments started and depreciate monthly (if the total amount not paid up front how should it be depreciated)? Thank you, in advance.



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