Improvements 4 years prior to renting, tax depreciable?

[Rliwma]

I added hardwood to my home 4 years before I rented it out. Can I depreciate that improvement ? If yes, where do I add that cost?

[PatriciaV · Accepted solution]

Unfortunately, this cost is not deductible as a Rental Expense. Improvements and upgrades made before you converted your home to a rental property would increase your adjusted basis.

The total basis in your rental property is depreciated over 27.5 years. So in effect, you will receive depreciation expense for the improvement.

Note, however, that the basis for depreciation is the lesser of the following amounts.

• The FMV of the property on the date of the change, or
• Your adjusted basis on the date of the change.

As long as your adjusted basis is less than the Fair Market Value, you would use adjusted basis as the value for depreciating your Rental Property.

[Rliwma]

I had my house appraised by a local real estate agent before I rented it out and it came to about 215K (210-220K). I bought the house in 2008 for 210K, and added about 10K worth of upgrades (floor etc). Also, I do not know what is the value of the house and the value of the land separately. In this case what will be my Basis?

[PatriciaV]

You have a choice.

If you use the appraisal as your basis, for example, with zero basis in the land, you will need to remember this for the future. When you sell the property, you must apply the entire sale proceeds to the basis (and nothing to the land).

Otherwise, you need to allocate the basis (whichever number is lower) to building and land. Property tax statements typically split out the land. You can use that ratio (building to land) to calculate a basis for the building by itself. Or the Realtor who did the appraisal may be able to provide a separate basis for the land.