Cost basis calculation for depreciation

[Callie Miller]

I have a condo unit that was converted from primary residence to rental property in January 2018. I calculated the cost basis for depreciation when I filled my 2018 tax return and thought everything was good. But now that I'm working on my 2019 tax return and revisiting the cost basis I did for 2018, I feel like it was done incorrectly. Please help me by taking a look at what I think the cost basis should be.

Unit was bought in July 2016, but was not converted to rental until 2018. So from what I read, I should be using either the fair market value at time of conversion or the cost of purchase plus addition/improvements, whichever is lower. I went to Redfin, Zillow and Realtor.com, and averaged the FMV out to be $322,000 for Jan 2018. I purchased the unit in 2016 for $309,000, and immediately updated the floor (changed from carpet to hardwood) and smoothed out the ceiling (had popcorn ceiling) which together costed $6000, so total $315,000. Since this is lower than FMV, I will use $315,000 as the cost of the property.

According to county tax assessment, the land value is $25,500. I then subtract this from the cost, so $315,000 - $25,500 = $289,500, which is my cost basis of the property. I converted the condo to rental property in January of 2018. So for 2018, the depreciation (using linear, 27.5 year use) is $289,500 * 3.485% = $10,089. Then every year after this, the depreciation would be $289,500 * 3.636% = $10,526 assuming it is a rental property for the entire year.

Does my calculation seems correct? Thanks in advance for all your help!

[Steven Hamilton II]

Originally posted by @Adam Rasmussen:

Your total cost basis (building + land + everything else) will be the original purchase price. Regardless if you convert immediately or later down the road. Your math appears to be correct when calculating the annual depreciation. Having said that, it doesn't necessarily mean it is the best way. With a purchase price of $306k I imagine you could break that down even further than just building and land. Look for components you can separate out and write off immediately (appliances being one that I see missed a lot). 

Actually it will be the lower of FMV or the actual cost when converted. You should know that as values can go down. Look at 2008.

Looks like a good rough calculation; however, your purchase price itself at closing does not necessarily reflect your basis as you have to adjust for the applicable closing costs and credits. There is a bit more to it than that and I'm going to point out that you're probably leaving a ton of deductions on the table.