Can I use the new appraisal value for the "cost of rental" property for depreciation?

[chiranjeevi-gunt]

Eg., Original house cost - 340k, Cash-out-Refinance cost(appraisal) (rented the house in 2022 ) - 500k. What should I mention for cost of the rental property in depreciation section?

[Carl]

No. You are required to use the "Lower" of what you paid for it when originally purchased, or it's FMV on the date placed in service.... whichever is lower. Refinancing the rental has absolutely no impact what-so-ever on determining cost basis for depreciation.

[Vanessa A]

 No, you would not change the cost basis of the house because you had an appraisal or refinanced the house.  If you first rented the house in 2022, then you would use the lower of cost (what you paid for it plus cost of improvements) or Fair Market Value (what it was worth when you converted it to a rental) for your depreciation basis.  So, if you what you paid plus improvements you made is less than the current price for the house, you would use the price you paid when you bought it. 

If you rented it out prior to 2022, you would not make any changes to the depreciation basis that you were already using.  Also, if you took cash out of your rental, and used it for things not related to the rental, you would not be able to deduct the interest on that portion of the loan.  You will need to prorate the interest deduction between rental and whatever the cash was used for.  

[Mike9241]

the tax laws DO NOT allow you to increase the tax basis because the valuation went up. I'm guessing but if they did then they also would require you to pay taxes on the increase in value. ie real dollars on phantom income. 

[Carl]

I'm guessing but if they did then they also would require you to pay taxes on the increase in value.

To clarify, there's a difference in appraisal value done by a property appraiser that is say, hired by the owner or by a lender to perform an appraisal, and the appraised tax value generally performed by the local taxing authority property appraiser. The tax value appraisal is for determining the property taxes to be assessed and nothing else. Generally, the tax appraisal will be on average, 30% lower than the appraised market value the property is expected to sell for. That's why, for the most part, the IRS does not accept the tax value of real property as the depreciation basis.