Can I depreciate prior year rental property improvements?

[falcon164016]

I converted my home to a rental property in late 2015. Prior to that, I replaced all of the flooring during 2014 and 2015, and installed a storm door in 2014. Can I include the cost of all of these improvements in the depreciable value of the home, or am I limited to the improvements made during 2015?

[DS30 · Accepted solution]

[edited] Yes you can include the 2014 capital improvements in your rental property depreciable basis. However you are limited to only including 2015 depreciation expenses of these capital improvements on your 2015 tax return. For deprecation that you missed for 2014 (for any improvements done in 2014 tax year), you will need to go back and amended your 2014 tax return to be able to include these 2014 depreciation expenses. Since the IRS will assume that you have taken these expenses in a prior year, you should include these prior year deprecation amounts as accumulated deprecation on your 2015 tax return.

For more information about deprecation on rental assets, please refer to this IRS link:

https://www.irs.gov/publications/p527/ch02.html

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. Generally the basis is the cost of the property plus the amounts paid for capital improvements, less any depreciation and casualty losses claimed for the tax purposes.

So in your case, you will include the cost plus all capital improvements (including your 2014 improvements). 

The property must be depreciated using the method and recovery period in effect in the year of conversion which is 27.5 years straight-line

[stephanie-gayle-]

I am new to this so pardon my ignorance. I have a bunch of expenses related to a capital improvement of a property that I paid in 2017. The improvement is a UK legal process (lease extension) which was finalised in Jan 2018. I was assuming I would wait and report all expenses related to this in 2018 but from the above it sounds like I include in 2017 even though it is not depreciable until 2018. Is that right?