personal property converted to rental, how to calculate cost basis for depreciation and amortize cost on original purchase and refinance before the conversion?

[sun7071]

I bought my primary residence in 2005 (30-year loan), refinanced in 2009 (30-year) and Feb. 2013 (30-year). Two month late in April 2013, I converted it to a rental property. Then in 2021 I refinance again (15-year). I did not claim rental depreciate at all. I also did not amortizing the closing costs except for 2021 refinance. Now I plan to file Form 3115 with a section 481(a) adjustment to correct all my mistakes in the past.

My questions:

1> When calculating the adjusted basis for missed depreciation, which years’ and what part of closing costs can be added to the basis—just 2005? 

2>  Which 2005 purchase closing costs can be amortized, and over what period given 8 years as personal use? 30 - 8 = 22 years?

3> Can any 2009 refinance closing costs be amortized, and if so, how (26 years, since there were 4years of personal use)?

4>  Do I treat the 2013 refinance similar way as 2009 refinance? ( 30-0.16years = 29.8years? since 2 months used as personal use)

thanks for help!

[AmeliesUncle]

I'll start off with saying I really think it is in your best interest to go to a tax professional.  If you made 12 years of mistakes by not claiming depreciation, it is quite possible that you made other mistakes that need to be addressed.

The answer to the last part of your first questions is yes, only closing costs from 2005 affect the starting Basis.  And only include costs required to purchase the house itself (mortgage fees, payments for real estate tax, partial month of mortgage interest, insurance, and escrow amounts are not used).

Before answering your questions (including something you said in the first part of your first question), maybe you could clarify a couple of things first:

1. Was the Fair Market Value in April 2013 (a) higher, or (b) lower, than the Adjusted Cost Basis at that time?  Most housing values crashed around 2007-2009, and if the Fair Market Value in April 2013 was LOWER then the Cost Basis, then that changes the depreciation (which affects your first question).
2. Were all refinances only a refinance?  Or was any additional money taken out?  If any money was taken out, what was the 'extra' amount used for?

[sun7071]

Was the Fair Market Value in April 2013 (a) higher, or (b) lower, than the Adjusted Cost Basis at that time?  Most housing values crashed around 2007-2009, and if the Fair Market Value in April 2013 was LOWER then the Cost Basis, then that changes the depreciation (which affects your first question).

           FMV is lower in 2013 per the appraised value for the 2013 refinance.  

Were all refinances only a refinance?  Or was any additional money taken out?  If any money was taken out, what was the 'extra' amount used for?

            Yes, all the refinances in 2009, 2013, 2021 are only refinance - no extra money were taken out.

[AmeliesUncle]

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@sun7071 wrote:

           FMV is lower in 2013 per the appraised value for the 2013 refinance.  

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For purposes of depreciation, you use the FMV on the date it was converted to a rental because it was lower than the Adjusted Basis.  That means the original cost and any original closing costs don't factor into depreciation.

The 2005 loan and 2009 refinance were purely personal and have no effect on the rental.

My first inclination is that the 2013 refinance is also only personal.  At the time, it was a refinance of your personal-use property.  When it was converted to a rental, the loan was already done and my first thought is that nothing would carry to the rental.  

• *IF* I am wrong about that (I have not researched it), I agree it would effectively be amortized for 29.8 years, but would have been disposed in 2021 when you refinanced again.