rental deprecation

[Skipper524]

I was living in a house that I bought 35 years ago for $135K.  Fifteen years ago I bought out my spouse’s share of the home for $89K, which was paid directly to her during the refinance and then the house was place in a sole and separate property trust.  Over the last 15 years may improvement have been made to the home.  That same house would sell on the market today for around $500K.  In November I decided to rent this house and move into a smaller place where I pay rent

My question is, how do I value the house for depreciation?

[RobertG · Accepted solution]

Your basis for depreciation would be what you paid for it, plus what you paid your spouse for her half, plus the cost of improvements, or the fair market value, whichever is lower.

When a personal residence is converted to business use (or for use in the production of income), its starting point for basis for depreciation is the lower of

(1) the adjusted basis on the date of conversion, or

(2) the property’s fair market value (FMV) at the time of conversion (Regs. Sec. 1.168(i)-4(b)).

[Carl]

My question is, how do I value the house for depreciation?

The response provided needs better clarification for you. So here goes.

I was living in a house that I bought 35 years ago for $135K

Were you single when you purchased it?

Do you live in a community property state? (This matters BIG TIME!)

Fifteen years ago I bought out my spouse’s share of the home for $89K

This is where it gets trickier now. If both you and your spouse were on the property deed  when you originally purchased the house 35 years ago, then "YOUR" personal cost basis in "your" 50% of the ownership is half of $135K, or $67,500. Then add to that the $89,000 you paid what I presume is now your "ex" spouse for her 50% of ownership in the property. This scenario makes your cost-basis $156,500.

Now add to that 156,500 ONE HALF the cost of any property improvements done *before* you purchased your ex's half.

Then add to that the total cost of any property improvements that were done "AFTER" you had 100% ownership of the property.

This total is your final cost basis. This is what will be used by the program to figure the amount to be depreciated over the next 27.5 years starting on the date the property is "available for rent".

If you live in a community property state, then it doesn't matter if you were single or married when you purchased it. Upon saying "I DO", your ex instantly had ownership of 50% of the property. So the above will still apply to you weather you were single or married when you purchased it.