Hello, I recently (2024) placed my former primary residence in service as a rental property and want to make sure I am getting things right here. I messed up the number in my original Tax Return for 2024 and will amend in the coming weeks. I've researched tons of publications, including the specific IRS guidance, but would appreciate any feedback from a seasoned expert as I am aware minor mistakes on Year 1 can (and will) turn into big trouble in the future.
Facts --> All Assessment and Land Values are taken from my state's real property assessment database
- The unit was bought in Aug 2019 and served as primary residence until March 2024. Thus, no depreciation has ever been claimed prior to March 2024 (mid-month convention and % rental property usage time were properly applied).
- Total purchase price (2019) including closing costs and legal fees = $446k ($433k without closing costs)
- FMV was not appraised at time of rental
- Total Assessment Value at time of purchase (2019) = $387,760
- Land value at time of purchase (2019) = $116,330 (30% of Assessment Value)
- Total Assessment Value at time of rental (2024) = $439,070
- Land value at time of rental (2024) = $131,720 (30% of Assessment Value)
- No capital improvements, no casualty or theft losses that were covered by an insurance reimbursement
My Calculations
Basis for depreciation = $446,000 (purchase price with closing costs, 2019) - $116,330 (land value at time of purchase, 2019) = $329,670
Annual Depreciation Deduction for 2024 = $9,120
$329,670 / 330 months = $999/month
$999/month x 9.5 months of rental usage in 2024 (0.5 month mid-month conversion deducted from total 10 months of rental usage) = $9,491
Questions
I'm aware that IRS Publication 527 - Residential Rental Property, page 23 - states that “When you change property you held for personal use to rental use, the basis for depreciation will be the lesser of: The FMV or Adjusted Cost Basis on the date of conversion." Since FMV was not appraised - I guess this happens quite often as it is not a requirement in order to place the unit in service - and I highly doubt FMV was lower than the adjusted cost basis at the time of rental, given that FMV estimates tend to be quite above the State Assessment Values, I assume that using purchase price as the basis for depreciation perfectly complies with IRS guidance. Thoughts?
Is it correct to deduct land value at time of purchase instead of at in-service placement? Since land value does not depreciate over time and it's fixed at 30% of the Assessment Value, I assume that land value at time of purchase is the right number to use. But I am not 100% sure since purchase price is what's being used as basis for depreciation rather than Assessment Value. Which one of the following is correct to be used as Land Value?
A) The $116,330 State Assessment Value (2019)
B) Apply 30% to the Purchase Price with closing costs (=$133,800)
C) Apply 30% to the Purchase Price without closing costs (=$129,900)
Thanks so much in advance!! If you guys feel like I am leaving any important aspect/value behind or miscalculating the basis for depreciation, I'd really appreciate your thoughts and feedback!!
