Houston Home Depreciation

[Mark Patel]

I bought a new roof and new flooring in 2012 for my rental in Houston and have been depreciating it every year. This year I sold the home for $136k and want to make sure I capture the correct cost bases. I paid $75k for the home, $5500 for new roof (in 2012) and $3000 for all new tile (in 2012).  Since I only depreciated part of the total repair cost ($5500+$3000=$8500) from 2012 to 2014 what happens to the remaining amount that I did not get a chance to utilize yet since I sold the property before I fully depreciated the improvements?  Another words out of the $8500 in improvement cost I used only $3000 in deprecation to lower my 2012 to 2014 tax bill.  What happens to the remaining $5500? 

Thanks

Mark

[Brandon Hall]

@Mark Patel

Yikes - several issues I've noted in your post:

1. You bought the home for $75k and claimed that as your cost basis, which essentially means you have valued your land at $0, which is incorrect.

2. You deducted your rehab expenses when you should have capitalized them as your property was not yet placed in service, or rent ready.

3. You depreciated your roof over 5 years instead of 27.5. A roof is part of the underlying structure and is therefore depreciated as the underlying structure is, which is 27.5 years.

My best advice is to seek a real estate CPA's advice as soon as possible. It may require several hundreds of dollars in fixing your previous returns, but it will be well worth avoiding the future headache of an IRS audit. And in the future, make sure you run all of this by a real estate CPA prior to preparing and filing your tax returns, as it seems you have filed erroneous returns for several years.