[2020 Tax] Rental Assets / Depreciation - Date when converted from personal to business + how to account for Cost & Land?

[sansu]

I have a rental property.  I converted it from personal to business use in 2008.

A few questions:

1) 'Date acquired' - since I converted this from personal to business use in 2008, what date do I put here?  Would this be the date when I actually moved out, or the date that I signed for a real estate agent to start listing it for rent?  Or the date when the first tenant started their lease?

2) 'Enter the total cost when asset was acquired' - 

a. I read the acquisition cost includes expenses.  Since this was purchased at an auction, the cost would include the auction sale price.  Would closing costs also be added on top of that?

What other costs should be added?

https://turbotax.intuit.com/tax-tips/rental-property/real-estate-tax-and-rental-property/L3e09vT71#d...

b. Does this include the cost of the land?  I don't see this anywhere on the paperwork from the auction, other than the tax assessor's document that is mailed yearly.

Appreciate all advice.

[Carl]

1) 'Date acquired' - since I converted this from personal to business use in 2008, what date do I put here?  Would this be the date when I actually moved out, or the date that I signed for a real estate agent to start listing it for rent?  Or the date when the first tenant started their lease?

None of the the above. It's the date you acquired original ownership of the property. That could have been 50 years ago. You could have acquired it buy purchasing it, inheriting it, someone gave it to you as a gift, or some other means of acquisition.

2) 'Enter the total cost when asset was acquired' - 

This is what you paid for the property when it was originally purchased. If ownership was acquired through other means, then it depends on the means of acquisition. If you inherited it, then it's the FMV of the property on the date the person you inherited it from, passed away. If it was given to you as a gift, then it's whatever the cost basis was for the original owner.

a. I read the acquisition cost includes expenses.  Since this was purchased at an auction, the cost would include the auction sale price.  Would closing costs also be added on top of that?

What other costs should be added?

It's what you originally paid for the property, plus any sales expenses incurred such as closing costs. But understand this if you took out a mortgage in order to purchase this property.

 - Cost related to acquisition of the mortgage are amortized (not capitalized) and deducted (not depreciated) over the life of the loan. An example of this would be loan application fees, as well as survey fees if a survey was required by the lender as a condition of the loan, and you (not the lender) had to pay for that survey.

- Cost associated with acquisition of the property are added to the cost basis of the property and depreciated over time. An example would be the title transfer fees you had to pay at the courthouse to remove the seller's name from the property deed and replace it with your name.

https://turbotax.intuit.com/tax-tips/rental-property/real-estate-tax-and-rental-property/L3e09vT71#d...

b. Does this include the cost of the land?  I don't see this anywhere on the paperwork from the auction, other than the tax assessor's document that is mailed yearly.

Yes. but how you record things depends. Did you purchase this property at auction in 2020? Or did you sell the property in 2020? Based on the content, it seems apparent to me that you sold the property in 2020. But I've learned to not make assumptions. So if you sold it, where exactly in the program are you reporting the sale? In the SCH E section of the program? The section for Sale of Business Property? Somewhere else?

the tax assessor's document

Under no circumstances and with no exceptions will you use any dollar amount from the tax bill in the process of reporting the sale of this property. If the program is asking you for numbers from the tax bill, it's only so the program can figure what percentage of your acquisition cost gets allocated to the land. You only need the tax bill for this in the first year the property is placed in service/converted to a rental. There is no need for the tax bill after that, when it comes to your taxes.

[Critter-3]

If this was converted way back in 2008 then all these questions had to be figured out way back then and should be on the depreciation worksheet from the 2019 return.  Did you fail to depreciate the property all these years ??? 

[sansu]

@Carl - thanks for the detailed response.

1. To clarify on 'date acquired' - this would be the date when it was originally purchased at an auction (2006), and NOT the date it was converted to a rental (2008).  Is that correct?

2. To clarify on cost of land - I am still not clear on how the cost of land is determined when placing the unit in service? 

I don't see the cost of land broken out separately in the auction documents (assume the auction sale price was $400K, which does not include closing costs). 

I am only able to find the cost of land (assume this is $90K) on the property tax assessment that was mailed to me yearly.   However, on the property tax assessment, the cost of land ($90K) + building ($90K + $135K) DOES NOT equal the auction price ($225K <> $400K).  Should it?

To answer the other questions:

1. Property was purchased with a mortgage in 2006

2. Property was sold in 2020

3. Property sale is reported in TT under  'Business' -> 'Business Income and Expenses' -> 'Sale of Property/Depreciation'

[Critter-3]

@sansu 

If you are entering this for the first time and did not depreciate the rental all of these years then RUN to a local professional so this grave error can be corrected.  This fix is not a DIY project.  

[sansu]

@Critter-3  - Understood.  No, this is not the first year depreciating the property, but I realized that the basis I calculated may have been incorrect.  

Will be seeking professional guidance on this, especially in the year sold (2020).  

[Carl]

1. To clarify on 'date acquired' - this would be the date when it was originally purchased at an auction (2006), and NOT the date it was converted to a rental (2008). Is that correct?

That is correct. Now if after you purchased it in 2006 and before you placed it in service in 2008, if you did any property improvements, those get added to your cost basis. Example:

Purchased in 2006 for $100,000. In 2007 you replaced the central A/C with a completely new system at a cost of 10,000. Your cost basis in the property is now $110,000. So that's what you would use as your cost basis when you placed the property in service in 2008.

2. To clarify on cost of land - I am still not clear on how the cost of land is determined when placing the unit in service?

I don't see the cost of land broken out separately in the auction documents (assume the auction sale price was $400K, which does not include closing costs).

The property tax bill is only used for determining what percentage of your cost basis is applied to the land. You will never use any numbers from the property tax bill on the actual tax return that you file. The program will ask you for property tax values only for the purpose of determining percentages.

Lets assume my numbers above, and that you paid $100,000 for the property in 2006. You would look at the most recent property tax bill - which if you had done this back when you were supposed to, would be the 2008 or 2009 tax bill; whichever you had in your hand at tax time.

Now lets say the property tax bill assessed the land at $25K and the structure at $45K for a total property tax assessed value of $70K. The simple math of 25/70 shows the land tax value is 35.7% of the total tax value. You paid $100,000 for the property, and 35.7% of that is $35,700. So you'd allocate $35,700 to the land. That leaves $64,300 for the structure.

But wait! You put in a new central air unit in 2007 at a cost of $10,000. Since the A/C is in fact "a physical part of" the structure now, that $10K gets added to your structure value, bringing the value of the structure to $74,300.

When entered into TurboTax, you'd enter $110,000 in the "cost" box (price you paid plus the cost of the A/C) and you'd enter $35,700 in the "cost of land" box. The program (not you) will do the math and assign $74,300 to the structure, and that's the amount that gets depreciated over the next 27.5 years.

Since land is never depreciated, it's value will remain at $35,700 for so long as you own the property. Even if you do land improvements later, it doesn't change that original value (which is not depreciated). A land improvement would just get entered as a totally separate asset that's classified as land so it's not depreciated, and still adds to your cost basis.