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Basis for rental part of home


Margaret CPA in OH

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Clients bought 12 room run down house and rehabbed investing about $150,000 so far.  The first floor was made into a separate apartment and lists for all costs have those particular to the apartment isolated.  This apartment was mostly completed before the personal space. 

In trying to determine basis, I can be easily persuaded to include all costs to the date of rental and then allocate by square footage ( almost exactly half) but wondering if there is any reason/benefit to exclude those expenses for building depreciation and mortgage interest and re tax then depreciating the improvements as improvements - or not. 

Before going through this exercise, I believe the value is going to be the fmv at time of rental being way lower than the costs.  An appraisal was done just prior to renting to obtain a mortgage to repay the family loan to that time.  The appraisal took into account most of the renovations for the rental space as well as the whole house.

Thoughts?

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It's the lower of FRV or adjusted cost basis at the time of conversion to rental, without land, for depreciation. So, the apartment is one whole thing, including everything done to get it in shape to rent. You'd break out appliances and other things with different depreciation lives, of course.

Then, any renovations after renting would get a separate line on the depreciation table as Renovations.

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Thanks, Lion, this is my inclination and I am quite aware of the isolation of land and separate line for renovations subsequent to rental.  I've already listed the appliances, too. I think I have to go with the appraisal for FMV, however, for the whole structure and allocate to the apartment as I don't see an easy way to account otherwise for common things like the new roof and gutters and plumbing which also benefit the apartment though not directly.  There is a separate HVAC system and water heater so that's easy.  Sharing the washer and dryer, not so much!

Thanks again!

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Thanks, Catherine.  I may or may not do that as the owners live on the second floor and there are 2 of them to the one tenant.  The man of the house works constantly on the yard and improvements so I would guess generates more laundry.  The tenant spends 3-4 months in Europe and around the world giving talks and attending conferences.  I think it isn't worth it myself.  They are all friends from
Germany so smaller things like this I think are not crucial.  If/when they sell to another owner who may rent out both spaces, they may have different decisions.

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On 3/28/2019 at 11:23 AM, Margaret CPA in OH said:

I believe the value is going to be the fmv at time of rental being way lower than the costs.  An appraisal was done just prior to renting to

It depends.  If the intent from the beginning was to rent a portion of the building then I would say use cost basis.  Otherwise, if the intent was to use it as personal and later decided to rent it out, then the conversion rule of reg 1.168(i)-4 might apply.  

But in this case where the rental portion was never used for personal purposes I would use cost basis regardless of the appraisal.  Reg 1.168(i)-4 only apples when there is a change in use.

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Thanks, DANRVAN. There was always the intent to rent the first floor apartment and client has identified specific costs for walls, flooring, radiators, painting, etc. which I can isolate as improvements at 27.5 yrs but believe I still have to depreciate the allocated rest of the building for the common costs of new roof, gutters, plumbing, etc.  The appraisal does have a note that says something to the effect of about $30K in recent improvements which would have been the first floor apartment costs.  So I will look at the balance of the incurred costs to Jan. 2018.  I will look at the section you referenced, too.

They are coming in soon to review all this.  And in 2019 are adding on a porch which is also accessible by private door from the apartment. I think that should be an allocated improvement for 2019.

Thanks again to all for input. 

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DANRVAN, I agree.  There was always the intent to rent the first floor apartment. And I have resolved all figures and am happy with the results.

What is distressing now (always something!), in Fixed Assets, one can choose only one state for situs and these folks have a rental in KY and now in OH.  KB was no help and I just posted a query to communities.  There was something about adjusting on one of the state returns but I've no clue how to do that.  Arrgh!

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