I moved to this property in June 2016. I converted the garage into an apartment for my personal use, repaired the upstairs living area (fully funtional two bedroom home) and continue to rent the upstairs. We share the utility costs. My personal portion of the total living space is 40% and the upstairs is 60%. I plan to continue this indefinitely. I have appropriated all the expenses into three main groups; rental maintainence/repair for upstairs, conversion of space (Residental Rental Real Estate), and shared expenses including taxes, utilities, insurance, ect. For the last group of shared, I have taken the first six months of expense as rental, and for the second half, applied the 60/40% split and then added the rental together. Does that make sense and is it legal?
A) It's FMV at the time the property was placed in service
B) What you paid for it, plus the cost of any property improvements you paid for.
99% of the time, item B is the lesser.
Are you saying you did not claim depreciation for 2014 and 2015? If so, that needs to be corrected by the long, complicated Form 3115. TurboTax does not support that, so I would recommend going to a tax professional that is experienced with catching up on depreciation using Form 3115.
Sort of. Form 3115 will 'catch up' on the missed depreciation by adding it to your 2016 tax return. So it will effectively give you a larger 2016 refund (or less owed).
As Carl said, you depreciate the LOWER of the Adjusted Basis and the Fair Market Value. That means you need to first find out the Adjusted Basis of the person who gave you the property.
No, you can't do that. Your cost basis is the *LESSER* of what you paid for it, or the FMV at the time it was placed in service as a rental. Since this was gifted to you and you assume the giver's cost basis, there is no question that what the giver of the gift paid for it, is the lesser. The IRS specifically states that you can not use the tax assessment value, except under extreme circumstances. Your circumstances are not even anywhere close to extreme.
"plus what I spent to build the house"
Wait a minute. YOu said earlier the house was gifted to you. Now you say you built it. What's the scoop here and what's going on? Before you answer, give me a minute to provide you some information that I'm sure will help you to clarify things. I have to provide this in an answer box, vs a comment box, because I can't highlight things in a comment box.
So the total purchase price of all of the land was $20,000. Then if your mother gave you exactly half of the land, your 'cost' would be $10,000 (assuming both lots of land were of similar value).
Yes, you then add the cost of building the house to the cost of the land. That is your "Cost Basis". Once you have that, then you can determine which is lower, your Cost Basis or the Fair Market Value when you started to rent it.
I have read through the info you kindly sent. Improvements I made in the conversion include plumbing changes, electrical changes (sub-panel and wiring), installed small kitchen, washer/dryer hook-ups, wall partions, replace garage door with windows, HVAC split unit. These were not "start-up" costs but were necessary for me to have a place to live. Still, they are part of the house overall and increase the value of the house. BTY, I will NEVER sell this place. Gave up a LOT to keep it in the divorce.
In what city/state/town/township/etc is the property located?