Today we hear from Joe in Iowa who tells us. “We have lived in our house for over 30 yrs. In April 2007 we began renting part (20%) of our home to a friend. How do I determine the basis of the rental portion (20%) of our home?”
Dear Joe,
It’s very simple, really. And you’re going to hate my answer.
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When you convert a property you already own to a rental property, your basis is the LOWER OF cost or market.
Naturally, cost includes your purchase price plus any improvements you’ve made over the years. Improvements are things like room additions, renovating bathrooms or kitchens, improving driveways, adding chandeliers…in other words, things that stay with the house long-term.
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For example, if you bought your home in 1975, you probably paid about $15,000 for it. Over the years, you may have added $15,000 worth of improvements.
So your total basis will be $30,000 – even if the current market value of your home is $300,000.
Now, you can’t depreciate land. So you need to deduct out the cost of the land.
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If you don’t have an original appraisal on hand showing the split between land and building, look at your property tax bill to see their breakdown of values between land and building.
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Once you have the land percentage, apply that to your purchase price only – not to the improvements.
And ta daaa! You have the cost of the land to deduct from your $30,000 basis.
Last step, apply the 20% that your new tenant is using – and that’s the depreciable basis for the rental area.
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Is this clear as mud?
You’ll find more information about rentals in IRS Publication 527 – Residential Rental Property
https://www.irs.gov/publications/p527/index.html
And remember, you can find answers to all kinds of questions about depreciation, basis and other tax issues, free. Where? Where else? At TaxMama.com
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- IRS Publication 527 :: Residential Rental Property
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