If you placed this rental into service in 2021, add the capital improvements (your renovation) cost to your original cost of the home. Then you will determine the rental use percentage based on square feet. If the capital improvements were strictly for the rental unit portion, then create a new and separate asset for the renovations of 2021. The first asset would be the original purchase price. Both should be depreciated using the 27.5 year or residential rental real estate selection.
You must determine the amount for land separately from the building. Land is an appreciable asset and therefore is never allowed to be depreciated.
- The tax assessment statement usually separates land from buildings so that could be used.
- Percentage allocation is one way to make a decision. If your personality is aggressive, you may want to allocate 80% of the value to the building and 20% of the value to the land. If your personality is conservative, you may want to allocate 60% of the value to the building and 40% of the land.
- This percentage method should reflect a reasonable inference as to the land value, then you can proceed to complete your tax return.
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