If the property improvements were all done before any portion of the property was converted to a rental, then your cost basis in the entire property structure (without including the land value) is what you paid for it, plus what you paid for all property improvements. Then take 35% of that for the rental portion. Example:
-Purchased property in 2000 for $50K
- Between 2000 and 2015 you did a total of $20,000 in property improvements.
- Started renting 35% of the floor space in 2020.
Step one, determine your cost basis split between structure and land based "soley" on your original purchase price of $50K.
a. Your latest property tax bill shows a tax value of $30K with $7K assigned to the land. So 23% of the tax value is the land.
b. 23% of your original purchase price of $50K is $11,500. So the land value is $11,500. (None of your property improvements to the structure change the cost basis of the land.) This means $38,500 of your original purchase price is assigned to the structure.
c. Add your property improvements to the structure value and you get $58,500 for the structure value.
Now in the program it will ask you for the total value (structure and land together) You'll enter $50,000 in the "Cost" box, and the land value of $11,500 in the "cost of land" box. Then the program (not you) will do the math to assign $38,500 to the structure.
Then depending on your other selections in the program, 35% of that gets depreciated over the next 27.5 years. Weather you manually figure the 35% or the program does it for you, depends on your selections in the program.
