We have a home we bought for personal use in 2000. We bought a new personal residence in Jan/2009, and rented out our previous home. How would we go about depreciating the cost of the old home? Would the 27.5 SL depreciation start on Jan/2009? And, how would we calculate the cost basis (we refinanced the home at 80% LTV in Jan/2008)? Thanks!
What did you pay for the property in 2000?
Did you make any improvements to your former home, such as add on a room, new roof, put in a pool, etc.
What does your property tax assessment say the land is worth and what the improvements are worth?
What month did you put your old home on the market for rent?
We need the answers to these questions to give you a precise answer to your depreciation question.
- Paid $181,000 for property in 2000.
- Added ceramic tile flooring throughout house ($3500) in 2000.
- Latest tax assessment is $215,000 ($50k of that is for land).
- Property placed in rental service on 1/1/2009.
You converted your former primary residence to a rental property. Your question is how to calculate the depreciation basis. OK. Let’s get started.
You say your current tax assessment puts a value of $215K on the property and allocates $50K of that to the land value. If we divide $50K by $215K, then 23.25% of your property’s value is allocated to the land.
If we apply this same ratio to your purchase price, then 23.25% of $181K is roughly $42000, which leaves $139K as your initial cost for the dwelling structure.
Starting with a cost basis of $139K, add the $3500 capital improvement to get a depreciation basis of $142500 for the dwelling structure. Since land can not be depreciated, your cost basis for the land is still $42K.
Even though you placed the property in service as a rental on Jan 1, 2009, the IRS will only give you credit for half the month of January for depreciation calculations. This is called the mid-month convention and it applies to residential rental property using the 27.5 year straight line depreciation schedule.
There is a table in IRS Pub 527 which will tell you that for a property placed in service in January, the first year depreciation is 3.485% of the depreciation basis. For each full year after that, your depreciation allowance is 3.635% of your depreciation basis.
Excellent - just the information I needed. Many thanks, Dave!