I am trying to add to my basis the costs of a renovation to my rental property prior to placing it into service.
There is a problem with doing it the way the program wants you to do it. Let me start by explaining how the program does it, assuming no property improvements were done prior to placing the property in service.
The program will ask you what you paid for the property, along with closing costs and the such to establish a base cost basis.
Next, you are asked for information from your latest tax bill. Now the assessed value of your tax bil is *NOT* used for the cost basis in any way. But if you look at the tax bill you will probably have a total assessed value of the property which includes the value of the land and the value of the strudture. These values are for *PROPERTY TAX PURPOSES ONLY! and absolutely nothing else. But you'll notice on that property tax bill that there is a breakdown of some sort for the structure and/or land.
For example, the tax bill may show a total value of $100,000 and a structure value of $70,000. Simple math indicates the tax value of the land is $30,000. More math indicates that 70% of the value is for the structure, and the remaining 30% is for the land.
Now lets say you paid $150,000 for the property and that's your cost basis. Based on your tax bill allocations, 30% of that $150,000 gets allocated to the land. So that means the cost basis in the land is $45,000 while the cost basis is the structure is $105,000. It's the structure cost basis that will be depreciated over the next 27.5 years. Now lets throw in say, $50,000 of property improvements you did before you converted it to a rental.
That makes your cost basis in the property as a whole, $200,000. Using the percentages of your tax bill, 30% of $200,000 is $60,000 with the remaining 70% ($140,000) allocated to the structure. But wait! That's not right! You're $10,000 short on the $50,000 property improvement you made! So how can we make the program do it right? Simple.
Enter the property improvement done before you converted it to a rental as a physically separate asset. Classify it as Residential Rental Real Estate, give it a COST of $50,000 with a Cost of Land amount of $0. The in service date for this asset will be the same as it is for the property itself. This will correctly add that $50,000 of property improvements to your cost basis, and more importantly, it will be "correctly" allocated for depreciation over the next 27.5 years, as it should be.
