Adding a Rental Property and Depreciation

[Amdano]

Hi, I am adding a rental property to my income taxes this year.  I am confused and would appreciate any help in this topic: 

Enter Property Tax Values

Use the values listed on your property tax bill to find this information. Your property tax bill may not show reliable assessed values if you've recently purchased a newly built house or made improvements to the property. If your assessed values don't reflect the full value of improvements to your property, you can still use the assessed land value.

However, you should enter the value of the improvements based on your cost for the portion of the property, plus improvements you added after purchase.

If you do not have your property tax bill, use the values listed on your insurance records to find this information.

Land value         ____23,000______

Improvements value (includes buildings, structures, fences, decks, etc.) ______?______

My question and confusion is about the amount to enter for the buildings, structures.

• I have the values listed on my tax bill which is $23K for Land and $31K for building structures. 
• I have spent $85K fixing up the property (improvements).
• I have the property insurance on the property and it's $385K for Dwelling replacement.

Which amount do I use?  If I use the cost plus improvements it's  ($85K) plus what I paid for the property that is a total of $108K ( I did not include the land value).  If I use the values listed on my Property Insurance Policy ($385k)  it is almost four times higher then the cost plus improvements.  They give the two options, which one should I choose?  

Thank you

[ColeenD3]

Did you buy it as a rental or convert it from personal use?

If you bought it and immediately made improvements, then your basis is cost plus improvements. Land is separated out for depreciation purposes, since it can't be depreciated.

If you converted it from personal use, your basis for depreciation of the property is the lower of Fair Market Value or adjusted basis. Your insurance has nothing to do with it. Fair Market Value is what you could sell it for today. You can use Zillow or other similar sources.

[AmeliesUncle]

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@Amdano wrote:

• I have the values listed on my tax bill which is $23K for Land and $31K for building structures. 
• I have spent $85K fixing up the property (improvements).

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1. How much did you originally pay for the property?
2. When did you purchase the property?
3. Was the property used for personal purposes prior to this?  If so, give details about the time.
4. Were the $85k of improvements done AFTER the date that the county assessed your property valuation at $23k and $31k?

[Amdano]

Hi, thank you for replying to my question. I bought the property back in 2010 for $30K when the housing market crashed. I basically bought a termite infested falling apart house that had city violations and I had to take permits for the violations and also for a room and bathroom addition and that was the majority of the $85K and also the garage had to be rebuilt due to fire damage when I bought it and I also had to installed concrete tile roofing for more fire resistant.  It took me as a owner builder till 2020 to finish it and was rented all of 2020. The county assessed the value when I completed the permits and was finalized and signed off. I lived 60 miles away from the property so I did stay there sometimes to work on the property.

[AmeliesUncle]

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@Amdano wrote:

The county assessed the value when I completed the permits and was finalized and signed off. 

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It seems odd that the county assessed the building value at $31,000 AFTER you spent $85,000 improving it.  So that valuation MIGHT be from a prior year.

At any rate, the purpose of the question is to figure out how much you PAID for the land versus how much you paid for the building.  You spent $30,000 for the original building and land, so you should make an educated guess on how much of that $30,000 was for land, and how much was for the original building.

Then you SHOULD be able to skip that whole property-tax-record question and ONLY enter the TOTAL cost and the LAND cost.  So let's say your educated guess that the original $30,000 was divided $15,000 for land and $15,000 for the building, then you should enter (1) $115,000 for your total cost (original $30,000 plus the $85,000 of improvements) and a land value of $15,000.  

[ColeenD3]

The purpose of the property tax information is to give you some idea of land costs. No once can guess how much is land vs building without some help.