Tax Advice, long-time tax platform user depreciation basis adjustment

[Laura Kreinbring]

This property is in the north end of Wisconsin. I used to live in this duplex and I moved out to convert it to 100% rental and refinanced. Other topics I have researched about changing the basis include "you don't transact closing costs as an expense in the tax year, it changes the entire basis"....and I have been trying to use a tax platform that I have been using for about 10 years. 

What do you think about what the platform professionals told me:

"

I understand you have a duplex and that previously you lived in half and rented out the other half (I am assuming a 50/50 area split). You have now converted the portion you used to live in to also be a rental property. Let's call the half you have rented out in the past Property A and the portion converted to a rental property in 2023 Property B. Although this is technically one single property, for tax reporting purposes, we will treat them as though they are two totally separate assets because they have experienced different use in their history. See "Renting Part of Property" in IRS Publication 527:

https://www.irs.gov/publications/p527#en_US_2023_publink1000... this situation, you have not disposed of Property A. Property A is still used 100% for rental purposes and its basis for depreciation is half of the total basis of the combined property at the time it was placed in service as a rental property. In other words, you have indicated the total basis of the combined property was $75,000, so that means the basis of Property A is still $37,500, it was still placed in service in 2019, and it will continue to be depreciated over the remainder of its depreciable life.

However, you have placed a new property in service in 2023, Property B. Property B will have its own separate depreciable asset record, as it was placed in service in 2023. The basis of depreciation for Property B will be the lesser of the Fair Market Value of the property on the date it was placed in service OR the cost of the property (plus any additions and improvements -- not repairs, but substantial improvements, such as additions or renovations). See IRS Publication 527, "Figuring the Basis" under "Basis of Property Changed to Rental Use" for more information:

https://www.irs.gov/publications/p527#en_US_2023_publink1000... the loan on a property does not change its basis (the FMV or the amount originally paid for the property), although as previously stated, you may have deductible expenses related to obtaining the refinanced loan.

Regards,
Carter, EA
Pro Support

"

[Benjamin Weinhart]

Hi Laura, I agree with what their assessment was and I would handle it the same way myself. Keeping the properties separate is mostly for the different depreciable lives and it wouldn't matter a whole lot when you eventually go to sell the property. It's also just easier administratively. You will still receive the same depreciation deduction per year since 27.5yr property is a straight line basis, just that the timings are a little different is all. Lower of cost or market for determining the basis is also the correct way to treat a personal use asset being placed into service for business purposes.