Originally Posted by NM123
#1;I recently purchased a house (Nov 2013). The house already had a tenant. I have agreed to let her stay until the end of the school year. I will keep the property as a rental.
I am tying to figure out how to do the depreciation on the rental and what amount of the closing fees can be claimed as expense or some goes under the basis for the depreciation.
#2;First, I purchased the house at a much lower price than the last tax assessment from the township... so I think I can just use the same land/building ratio from last time to estimate the amount that should be for the building that I can depreciate...
#3; However, can I use part of the closing fees for expense or to increase the amount of the basis?
#4; Do I use the entire amount on the building estimated price or split it between land and building.
During the closing the previous owner also forwarded me some of already collected rent and the tenants security deposit. I will include this rental as income.
#5;I understand that the security deposit is no required to be reported as it will be returned to the tenant.
#6;I also paid for the insurance for 12 months... hence some is for year 2014. I will need to prorate the amount for 2013 and use this as expense for 2013, right?
#7;I had to do some minor repairs. I performed the work by myself. I purchased some tools, paint, etc... can I put this as expenses for 2013?
#8;Finally, I pay the water bill. What happens if the bill for Dec, comes in January and includes days from January?
#9;Do I have to prorate the amount for the days in 2013, or I put the entire amount in the next year?
I much appreciate your answers.
#1;As yu can see, since you own the home for purposes of rental income, you should calculate depreciation on the home for tax purposes. Spreading the cost of the home over a number of years reduces the impact of rental income on tax returns during each year the home is used for that purpose. For residential real estate, calculate depreciation on the home over the 27.5 years under S/L method you are allowed to deduct it for tax purposes. Look up the cost basis for the home being used as a rental property. In most cases, this amount is the total purchase price of the home, including both the down-payment and the mortgage amount. (those who you lived in the home before converting it to a rental property, the cost basis is the lower of either the purchase price or the fair-market value of the home at the time it is converted to rental property.). Subtract the FMV of the land from the cost basis of the rental home. Land is not subject to depreciation. For example, if you purchased a rental home for $270K and the land on which it sits is worth $30K, then you will be able to depreciate $240K for tax purposes. You need to divide the value of the rental home by 27.5 years to find the annual depreciation of the home. For example, $240K divided by 27.5 equals $8,727 of home depreciation per year and $727.25;$8727/12 per month to include on your tax return. Count the number of months from the first point the home was available to be rented until the end of the calendar year. The first of these months only counts as half a month, so if the home was available beginning in September, it counts as 3.5 months for tax purposes (half of September, plus October, November and December).Divide the number of months by 12 to find the portion of the year's depreciation to claim. In the above example, 3.5 divided by 12 is 0.29 of the year.Multiply the portion of the year the home was used as rental property by the annual depreciation you had calculated. In this case, 0.29 times $8,727 is $2,531 of depreciation to claim for the first year. When you dispose of the home , then you MUSTrecapture the unrecap depre on your return as ordinary income taxed at 25%(as long as your tax rate is 25% o rhigher) as unrecxap r/e depre; it is neither sec 1245 nor sec1250 rule.
#2;Then, the depreciable basis of the home is FMV( I mean the purchase price that you paid for the home) as a depreciation basis represents what you would pay for an asset in an arms-length transaction. Acquisition costs; included are any commissions, title fees, transfer taxes and the cost of any options to purchase.--such as closing costs can increase the depreciation basis of the asset. your basis , the historical basis, is increased by the cost.
#3;as mentioned above.youmust split it between land and building since you can never depreciate the land.
#4;report it as income on Sch E of 1040.
#5;correct; report it as deposit receivable in debit and deposit payable in credit in your book.
#6;correct. say in june 1, 2013, you paid $1200 for prepaid ins, then on 2013 return, you can deduct $1200*7/12=$700; and you need to deduct the remaining $500 on your 2014 return regardless of your acct method.
#7;you can deduct repair costs on Sch E of 1040 on your 2013 return, 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 Schedule E of your personal 1040 tax return. Maintain good records. To deduct rental repairs, you must be able to document the write-off. Find a safe place to store all of your receipts for tools, canceled checks and bank statements. Keep track of any travel expenses you incur for rental property repairs. You are allowed to take the standard mileage rate or deduct actual expenses. You can deduct the business portion of necessary travel expenses for airfare, meals and lodging when traveling out of your immediate area.
#8; If the rental property is used for a business, utility expenses qualify as a business outlay and are tax-deductible. Other expenditures associated with the use of the property, such as rent, renter's insurance, as well as investments you have made into the property, can be deducted from the taxable gross income of the business.
#9;aslongas you pay the bill by the end of 2013 as most cash basis taxpayers do, then deduct it on your 2013 return.