My wife and I had our personal residence built ~10 yrs ago. In December of last year, we purchased a new personal residence, and have decided to rent our former home out (instead of selling it). Can someone tell me how(/if) we can claim depreciation for tax purposes? Since we officially moved into our new home at the very end of December of last year, I realize this won’t be an issue for taxes NOW (but, rather, next year), but just want to understand the rules. For example, we purchased the home 10 yrs ago for $172k, and it now has a FMV of $221k, so do we take the improved value of the $221k (or $181k, since the land value is $40k) and start the 27.5 yr SL depreciation starting January of this year? Thanks!
Your depreciation basis is determined by the amount you actually paid for the property plus the out of pocket cost of any capital improvements you might have made since you purchased.
The calculation of your depreciation basis has a few more steps than your question suggests.
Start with the tax assessors value of the property. Pull out your current tax assessment and see how much of the value of the property is allocated to the improvements (the dwelling structure) and how much is allocated to the land. Compute the ratio of the value of the building structure to the total value of the property.
For example, if the tax assessor says your property is worth $200K with $50K of that value attibuted to the land and $150K attributed to the improvements, then 75% of your property’s value is allocated to the dwelling structure.
Now take the amount you actually paid for the property and multiply by 75%. Add to this number the out of pocket cost of any capital improvements you have made. The result is the depreciation basis for your house.
In this example, with a 75% ratio and a purchase price of $172K, your depreciation basis would be $129K plus the cost of your capital improvements.
Look up the IRS publication on Depreciation and find a table for the 27.5 year, straight line depreciation schedule which tells you to compute how much depreciation you can take this year depending upon the month of the year you placed the property in service.