Depreciation

[hmbwoodman]

This rental property was purchased in 1993 as a personal residence.  It was converted to a rental property in 2019. The total purchase price in 1993 was $278,000.00 but I can find no information in my files or online that shows what part of the original purchase price was for the land and what part was for the improvements.  I tried several of the online property search vendors but none were able to provide the needed information.  The property tax records at the county tax assessor's office only go back to 2008.   Is there a standard protocol for this situation or am I simply left with crossing my fingers and taking a wild guess?

[Carl]

Pay attention to detail. The program is asking for your ***CURRENT*** tax bill. Not your tax bill from 20 plus years ago.

[Anonymous_]

---

@hmbwoodman wrote:

The property tax records at the county tax assessor's office only go back to 2008.   Is there a standard protocol for this situation or am I simply left with crossing my fingers and taking a wild guess?

---

The safest approach would be to engage a licensed (certified) property appraiser in your county to do a retroactive (historical) appraisal of the property, obviously for 1993. 

Alternatively, you could use the land/improvements split on your most recent property tax bill and apply that retroactively (to the 1993 purchase price of $278,000).

[Rick19744]

Once you determine the split between land and property as discussed in the other posts, it is important to understand a couple of other items to make sure you start down the right path and have the correct information for the future:

• 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.  Most likely the original cost plus any improvements will be the basis, but just want to make sure this is understood.This special basis rule is intended to disallow a loss from a decline in value that occurs before the conversion date.
• It is also important to document what the FMV of the property is at the time of conversion.  This may come into play when you sell and if you document this now, you won't have to figure it out at a later point which may be difficult to do.
• When the property is sold the basis is calculated differently for gain or loss. When the property is sold at a gain the basis is the original cost plus amounts paid for capital improvements, less any depreciation taken. When sold at a loss the starting point for the basis is the lower of property original cost or the FMV at the time it was converted from personal to rental property.

[Carl]

Here's some additional information you may find helpful.

This rental property was purchased in 1993

I have absolutely no doubt that what you paid for the property in 1993 is the figure that will be used for depreciation, since that amount is the "LOWER" amount.

Additionally, as a first time landlord it is of my personal opinion (and we all know what those are like!) that the program does not provide you the clarity needed for you to set this up correctly for your first year as a landlord. Even the tiniest of mistakes will grow exponentially over time. Then when you catch it years down the road the cost of fixing it will be expensive. Therefore I am providing the below information so you can have that clarity. Of course, if you have more questions, then by all means please ask!

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2^nd home before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3^rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.