Improvements are usually depreciated over 27.5 years and added to cost basis. If any of my improvements are added as de minimus safe harbor/ safe harbor for small business deductions, do I get to add these expenses to my cost basis as well?
For eg: My current cost basis for rental property is say 500,000. Let us assume, I have 2,000$ expense for replacing my water heater. If I depreciate it, my new cost basis for my rental property would be 502,000.
If I deduct this expense fully under safe harbour, does my cost basis stay at 500,000 or does it still increase to 502,000?
Thanks. If I understand correctly, anything that is not depreciated over time will not be added to cost basis.
Some improvements are depricated over 5 years such as appliance, carpet. Some improvments are depriciated over 27.5 years such as HVAC.
How these are added to cost basis considering these are not included part of Safe harbor. Does appliance expenses stays in cost basis only for 5 years and HVAC expenses stays in cost basis for 27.5 years?
For eg: If current cost basis is 500,000. Appliance replacment cost is 3,000 and HVAC replacment cost is 7,000. Would my new cost basis would be 510,000 ? Would it reset to 507,000 after 5 years assuming there is no new improvments done?
All assets listed on the depreciation worksheet have their own basis in addition to the property itself. They do not add to the basis of the property and you will NEVER change the basis of any property once placed in service. If you sell the property you will sell all the assets listed as well ... that is how you capture this extra basis.
Safe Harbor for Small Tax Payers says "Annual expenses for repairs, maintenance, and improvements, cannot exceed the lesser of $10,000 or 2% of the building’s unadjusted basis"
What is the 2% of building’s unadjusted basis here?
Let us say I bought my primary home for 500,000. Initial loan costs is 2,000. Capital improvments I made when I used the property as primary home for 4 years is 15,000. If I convert my property to rental now, what would be by building’s unadjusted basis.
Assuming my building value is 50% and land value is 50%, would my building’s unadjusted basis be 50% of 500,000 or 50% of 502,000 or 50% of 517,000?
Your unadjusted basis is the original cost to purchase the asset.
In your example that would be 517,000.
If I make another improvment of 10,000 after converting to rental, then my new unadjusted basis would become 517,000 + 10,000 = 527,000, correct?
In other words whether my unadjusted basis will increase as I make improvment to rental property over the years or whether it will be always be the cost basis at the time when I converted my primary home to rental property?
Yes BUT it would be a total of all the assets unadjusted basis combined ... do NOT adjust the original asset basis instead you simply add a new asset to the list being depreciated.
When you say unadjusted basis, do you mean basis without reducing depreciation, is that correct?
Yes, unadjusted basis is the cost without reducing it for depreciation. And to be clear, you would add all assets placed in service that are part of the building structure (original building, each capital improvement, such as roof, remodel, etc).
This information is used to determine if you are eligible for the small business de minimis safe harbor, however, anything you expense under this method does NOT add to the cost of the building.
Note: Appliances do not add to the cost of the building they are separate and identifiable for any future sale or remain on the asset list until they are disposed of through other means such as junked.
You *do* *not* *ever* change the basis of an already entered and existing asset under any circumstances. There are no exceptions. Doing so will completely skew the depreciation and depreciation history.
When you have a property improvement that adds to the basis, you enter the improvement as a completely new asset in the assets/depreciation section. Depreciation on the newly entered asset starts on the date it was placed in service. It does not matter when the improvement was paid for, and it does not matter when the work was started or completed. Depreciation begins on the date the improvement is placed in service.