My spouse lived in another state for work and bought a loft in a brand new building as a primary residence for $245K in 2007. In late 2009, he found another job and was able to move back to our home (which is my sole primary residence). He wanted to sell the loft, but that's when the market tanked. The builder filed for bankruptcy and sold the remaining units for around $100K. The values on the lofts never fully recovered and remained under water so no one was willing to sell at a huge loss. He converted his unit to a fully furnished rental at the very end of 2015. We started the depr schedule in 2016. I think the cost basis used may have been too high ($249,500). My husband suffers from memory loss and doesn't recall where he got that number from. Maybe the tax assessment? A couple of units sold in 2017 for $190K. There had been no sales of any other units prior to 2017, so no comparables and there was nothing else like these units in the small town.
The unit was rented completely furnished. The furnishings were depreciated under one line item based on our estimated value of what it was worth. Since then, an IRS agent told us that you can't depreciate furniture, but Turbotax specifically lists it under category F: "Rental appliances, carpeting, furniture", so we thought it was allowable at the time since it was business use. We aren't sure we used the correct valuation either and have no means to prove the value if audited. We looked up the value of similar furnishings online at the time. We also depreciated the appliances based on what we thought they would cost at the time of conversion.
The loft was just sold (all furniture included in the sale) at the end of 2020 for $225K so a loss since it was purchased for $245K.
I know we have to recapture depreciation in 2020, but I'm not sure about any corrections we might need to make and how to go about doing that. I know you can only go back and amend 3 years. I still have Turbotax 2017, 2018 and 2019 installed (not 2016) so can amend if necessary.
Does it sound like our cost basis on the property is incorrect? What impact on our taxes would lowering the cost basis have, given that we sold the unit for less than purchased? Our prior returns show substantial losses on this rental from 2016 on. It was also rented at a monthly loss as he couldn't charge high enough rent to cover the HOA monthly fees nor the entire mortgage payment in that market.
Can we depreciate furniture in a fully furnished rental and how does one prove the valuation from the past?
Thanks for any advice.
