Cost Basis for Depreciation

[Kurt Stein]

Hi BP, I'm preparing my taxes and am trying to determine the value of depreciation that I can write-off on my taxes. Where do I find the cost basis (value of structure) for my rental property? Is it on the county website or is it on a document somewhere from closing? Also, I have two capital expenditures that added value to the home, a $2800 driveway widening and a $3000 deck/pergola in the back yard. I began renting the unit out July 1, 2016. Can anybody help walk me through this calculation? Thank you, Kurt Stein

[Paul Caputo]

I highly recommend taking a look at IRS Publication 527 for info on cost basis and everything else related to taxes on your rental. 

Those numbers look correct to me. There are a bunch of things that can adjust the basis up or down so make sure you've accounted for everything. 

Did you place the rental in service in June? It's placed in service when it's ready to be rented regardless of if its rented or not. So unless you had a tenant lined up and it was ready on July 1st; I'm guessing you advertised it and it was ready in June with a July 1st start date. So if it was placed in service in June (or earlier) you use a mid month convention starting in June 2016, so you get 6.5 months of depreciation on the residential rental property which depreciates over 27.5 years. That's 1.970% depreciation in 2016 for June in service date. 

Both the $2800 driveway widening and $3000 deck would be land improvements that get depreciated over 15 years with a mid quarter convention. Depending on if they were done in April-June or July-September they'd be either second quarter or third quarter with 6.25% depreciation or 3.75% depreciation in 2016. 

Beyond that there are assets that would be considered tangible personal property that get depreciated over 5 years within the residential rental property. That's where things get a bit too technical when you start looking at the nuts and bolts of the property for depreciation. There's generally at least 10% of the cost basis that qualifies for accelerated depreciation on property over $200K less land. 

So in that $257K cost basis there could be $25K-$35K+ in tangible personal property depreciated over 5 years with 200% declining balance accelerated treatment and a mid quarter convention. so depending on the placed in service date either second quarter or third quarter for either 25% depreciation or 15% depreciation in 2016. 

As you may imagine with a larger property accelerated depreciation can be quite beneficial. Here's the thing: you're not supposed to just say 10% of the cost basis is tangible personal property, you're supposed to have actual documentation that 15.2% of the cost basis is tangible personal property, 10.3% of the cost basis is land improvements, 74.5% of the cost basis is residential rental property and descriptions of everything. 

The process of identifying assets for proper depreciation classification is called cost segregation. A forensic engineered cost segregation study is performed by a qualified construction engineer with a site survey followed by 4-6 weeks of number crunching and preparation of documentation. 

Because of the high level engineering work and time required for such studies they were initially reserved for high priced properties over $5 Million since early studies cost over $100K and were only done by large accounting firms with engineering departments. Independent cost segregation firms have brought the costs down considerably and now any property owner can get a cost segregation study for a few thousand depending on the size and complexity of the property.