Can home remodel/improvement be depreciated after the house becomes rental?

[lovebbmm]

We moved and rented our previous home out last year.  Can the remodeling/home improvement we did several years ago (when it was our primary residence) be treated as an assets for depreciation since it is now rented out?  Or can it only treated as an addition to the cost basis when the house is sold?

If the home improvement can be depreciated for rental expenses, should I also put it into Turbo in the Rental Asset section or just leave it in the Property information section?

Thank you in advance for your help!

[ThomasM125]

You do need to add the improvements as an asset and depreciate them. You can just add them to the cost of the property when you set it up for depreciation to make it easier. You enter that as an asset in the rental section of TurboTax.

[Carl]

Basically, you are required to depreciate rental property. You really don't have that much of a choice. You don't really need to list the property improvements as separate items, so long as everything was placed in service as a rental asset on same date. You can just add the cost of the property imporvement to the cost basis of the house. Makes it simpler and easier later. O course, you can list the improvements as separate assets if you want. but it's just more work on your part when you later sell or otherwise dispose of the property.

Generally, you are required to depreciate anything that is utilized on a recurring basis for the production of income.

[lovebbmm]

Thank you very much for the helpful information! A few more questions:

1. After the purchase price, Turbo asks "what was the fair value of the property".  I simply put in the same purchase price at the time we bought the house.  If I place the improvement costs along with the purchase costs, should I add the same improvement costs to the fair value section as well?
   
   
2. When Turbo asks for the value for land and house/improvement value for depreciation calc, should I also add the remodeling/improvement costs to the appraised improvement value?
   
   
3. We had some expenses (for example deep cleaning and repairs) when the house is in rental status, how do I enter them into Turbo without being prorated by the number of days for rental in the year?

Thanks again for the reply!

[Carl]

1. The program is going to use the *lower* of what you paid for the house, or it's FMV at the time you placed it in service. I have no doubt that what you paid for the house when you purchased it, is the lower price. So putting the same price as what you paid for it is fine.

2. When entering the property asset initially, the program asks for the value of any improvements. (Just stated that to make sure we're on the same page.) I do not recommend you add improvement values here, because the program does not do the math right (and it never has). Here's an example of how it does it wrong.

The program will ask you for your tax values from your latest tax bill. Lets say your latest tax bill values the land at $30K and the structure on that land at $70K.  That means 30% of what you originally paid for the house was for the land, and the remaining 70% was for the structure. This is based on your *current* tax bill.

So if you actually paid $250K for the property when you originally purchased it, 30% of that is $75K and is what the program will allocate to the land. The remaining $175K is allocated to the structure and is what get depreciated over the next 27.5 years.

Now, when the program asks if you have any improvements, lets pretend you have $50K of property improvements to the structure. Maybe you put a new roof on the house shortly after you purchased it, and then later remodeled the kitchen. The way the program is going to handle it is to establish a new cost basis of $300K (the $250K you originally paid, plus the $50K of property improvements) then 30% of $300K is $90,000 that gets allocated to the land with the remaining $210K allocated to the structure. That's wrong.

Based on the tax bill percentages and your *original* purchase price, your land value remains at $75K. Then the property improvements (the entire $50K) gets added to the structure value giving you a total of $225K for the structure. It's that $225K that gets depreciated over time.

So tell the program that you do "NOT" have any property improvements. Then when you get to the screen with the COST box and the COST OF LAND box on it, it will show $75K for the land and $250K for total cost.

Add your $50K of improvements to the total cost. Then the COST box will read $300K and the COST OF LAND box will remain unchanged at $75K. Now the program will depreciate the correct amount of $225K over the next 27.5 years.

3. Why is anything being prorated? For starters, any cleaning/maintenance/repair expenses incurred while preparing the property for rent for that very first time, are just flat out not deductible. Period. Expenses incurred between renters are fully deductible *PROVIDED* there is no personal use of the property during that period. Those vacant days are also counted as days rented too.

Nothing gets prorated provided you did not live in the property as your primary residence, 2nd home, vacation home, or any other "personal pleasure" type of use *AFTER* you converted the property to a rental.  Therefore you will tell the program that the property was rented *the whole year*. Otherwise, if asked for days rented, the day count starts on the first day a renter "could" have moved in. As for days of personal use, it's asking for personal use days *AFTER* you converted it to a rental. So if you have no "personal pleasure" type of use after that date of conversion to a rental, the personal use days is ZERO. Anything higher than zero, and everything gets pro-rated, like it or not.

[lovebbmm]

Thanks a lot for the clarifications.  I'll give it a try in Turbo.  Glad to have such an expert like you on the forum!