Hi – I have two questions to ask concerning some deductions:
On the rental properties that I purchased, can I continue to deduct the appliances that the old owner used to deduct prior to selling me the property? In other words, if the seller had 10 years left on writing off the depreciation on the appliances, can I continue to take the depreciation of the appliances for the 10 years that is left, or would I be able to reset the depreciation clock back to 27.5 years of writing these items off since I purchased them with the properties.
When I am gathering my property information for my CPA, do I give him the purchase price of the property minus the land for the depreciation deduction, or should I base it on what the Assesor’s office have in their property records? Which one would be more to my advantage to base my deduction? A higher value, or the lower Assesor’s office value?
The IRS requires you to allocate your purchase price between land and structure to arrive at your depreciation basis. Use the tax assessor’s ratio of land to property value to determine the purchase cost of the land for your new property.
When you purchase a property, you establish a brand new depreciation schedule. Residential rental property is depreciated over 27.5 years, while personal property such as washer/dryer, refrigerator, and range are depreciated over 5 years. If you choose the segregate the cost of the appliances from the cost of the property, then use the 5 year depreciation schedule. If you don’t choose to segregate until you replace the appliance, then just depreciate the entire structure to include the appliances as a single depreciation asset over 27.5 years.
Give your CPA you purchase price for the property, a copy of the HUD-1 showing all your settlement charges, the tax assessors value of the land and structure, and your estimate of the fair market value of the used appliances. S/he will know how to figure out the cost basis for depreciation and the asset class for each item.
Instead of just handing all your stuff to your CPA, try to do the work yourself to make it easier for your CPA. Go to DepreciateEm.com, the site offers a full explanation of how to depreciate residential rentals, and also gives you a specific breakdown of which values are needed from your HUD (it will tell you the exact line entries you need).
I strongly recommend doing it this way first. It will save you a lot of time and money. The website will visually show you the implications of using different numbers for your basis, and accounts for values that are normally overlooked. Hope this helps.
I actually posted a very similar question just a few days ago… Look for the thread with the topic heading “accelerated depreciation,” you might find some more information there.