Once you determine the split between land and property as discussed in the other posts, it is important to understand a couple of other items to make sure you start down the right path and have the correct information for the future:
- When the property is converted the basis for depreciation is the lower of the adjusted basis on the date of conversion or the Fair Market Value (FMV) of the property at the time of conversion. Most likely the original cost plus any improvements will be the basis, but just want to make sure this is understood.This special basis rule is intended to disallow a loss from a decline in value that occurs before the conversion date.
- It is also important to document what the FMV of the property is at the time of conversion. This may come into play when you sell and if you document this now, you won't have to figure it out at a later point which may be difficult to do.
- When the property is sold the basis is calculated differently for gain or loss. When the property is sold at a gain the basis is the original cost plus amounts paid for capital improvements, less any depreciation taken. When sold at a loss the starting point for the basis is the lower of property original cost or the FMV at the time it was converted from personal to rental property.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
