All Forum Posts by: Ed Shin

@Ashish Acharya @Linda Weygant @Michael Plaks Thank you all for taking the time to respond to my question, which I recognize is a rather niche question.

@Michael Plaks Thanks for pointing me to the specific IRS regulations that deal with my question. After reading the regulations, I see that my house was converted from personal use to business use when it was rented out, treated as a disposition of the property when I started living in it again, and will be converted to business use again when it is rented out again. Given the disposition of the property, I can see how the adjusted depreciable basis (remaining depreciable basis + capital improvements) would need to be depreciated under a new 27.5 year schedule. The annual deduction will, of course, be lower than if I continued with the initial depreciation schedule, but not significantly.

Regardless of how many times I convert my house back and forth from a personal home to a rental property, my passive losses will continue to carry over and depreciation recapture will only occur when I sell the property, right?

We converted our primary residence into a rental when we were stationed overseas five years ago. During those five years, we claimed depreciation (based on a 27.5 year depreciation schedule), mortgage interest, and other costs associated with our rental on Schedule E and reported suspended passive losses on form 8582 - based on consultations with a professional real estate CPA. After those five years, we have lived in our house as our primary residence while stationed back in the U.S. over the last year, so we ceased claiming depreciation and other rental costs.

Next year, we will rent out our house again. The real estate CPA with whom I previously consulted advised that we should pick up where we left off on the previous depreciation table from before (i.e. continue to claim the same amount of depreciation with 22.5 years left on the original 27.5 year depreciation table) and depreciate over 27.5 years any improvements made to the house while we lived in it over the past year. A couple of friends who have been in a similar situation said that CPAs with whom they have consulted have advised the same course of action.

However, a CPA at a rental property seminar I attended advised that we should start a brand new depreciation table with a new adjusted basis. Per this CPA, we should take the adjusted basis from five years ago, subtract the amount of depreciation taken over those five years, add the cost of improvements made while the house was a primary residence over the last year, and depreciate over 27.5 years.

Given the conflicting guidance, I'd welcome any suggestions on the best course of action for claiming depreciation on our house when we place it back into service as a rental property. Thanks.

@Michael Plaks

Thanks for your explanation.

Is my understanding correct that improvements made when the house is a personal residence - before it is converted into a rental and placed into service - can either be added to the cost basis of the house or be depreciated separately on their own schedules when placed into service on the same day as the house?

For example, 2 years before we placed our house into service, we installed a new patio and driveway and purchased a new fridge. It would be more beneficial for us to depreciate these separately on their own schedules (15 years for the patio and driveway, 5 years for the fridge) than to add them to the cost basis. We would need to depreciate them based on their current fair market value, right? I understand we can determine the FMV of the fridge by searching for current prices of similar, used models, but how would we determine the FMV of the patio and driveway? (I imagine the cost of replacing them would be comparable, if not more expensive, than what we paid for them.)

Thanks for the helpful feedback and clarifying the terminology ("adjusted cost basis" v. "depreciable basis")!

So if some folks recommend allocating 100 percent of relevant closing costs and improvements made prior to being placed into service to dwelling structure versus allocating part to land and part to the dwelling structure, are they just more aggressively interpreting the regs?  (I noticed that Turbo Tax allocates part to land and part to the dwelling structure.)

Similarly, IRS regs seems to suggest - and some folks have stated - that only improvements made before placing the property into service can be added to the basis, while others say that repairs and landscaping done before placing the property into service can also be added to the basis.  Is this another case of conservative and aggressive interpretation of the regs?

I've searched the forums and haven't found any discussions that address a couple questions I have about calculating cost basis of a rental property.

1) I know that to determine cost basis, you need to multiply the purchase price of the house by the land/improvement ratio, which you can calculate based on your property tax assessment or the appraisal from when the house was purchased.  Would I use the property tax card from the year I bought my house (2015), the year I put it into service (2017), or the latest one (2018)?  Similarly, would using the 2015 appraisal be valid?

2) To calculate adjusted cost basis, it's necessary to add closing costs and costs of improvements and subtract agent rebates/seller credits.  But is this done on the original purchase price (before subtracting the land value) or on the cost basis (after multiplying the purchase price by the improvement ratio)?

@Michael Plaks

Thanks for your input.  Is our situation still considered permanent conversion into a rental property if we plan on living it again when we return to the United States in 2-3 years?

Also, is there a guideline regarding when repairs must have taken place prior to the rental start date to be considered deductible expenses?  For example, we did some painting in September, some plumbing in October. some other work in November to prepare the house for the tenants to start renting December 30.   Can we deduct those expenses?  (We are living in the house right until the tenants move in.)  Thanks!

I've got questions about deductions we can take on our rental home, which we are renting out for first time, with the tenants set to move in December 30, 2017.  It's my understanding we don't have to pay taxes on the rental income for our 2017 tax returns since it's less than 15 days.

*We are switching our homeowner's insurance to landlord's insurance that day and will be paying for 6 months or a year of coverage through 2018.  Since we are paying at the end of 2017, but the coverage will extend through 2018, can we deduct a prorated amount of the insurance payment we made in 2017 on our 2018 tax return?

*Similarly, we have incurred various expenses (painting, plumbing, etc.) in late-2017 to get our house ready to rent.  Is there any way to deduct those expenses on our 2018 tax returns?

Thanks!