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Rental depreciation: property tax improvement might be inaccurate?

Let's say I bought my house with 500K, and did the following improvements before converting it to rental:

 

- 100K remodel (county does not know)

- 250K home addition (county reassessed the value)

 

So the total cost of the house is 850K (let's assume this is the basis for depreciation, not FMV).

 

Now, the latest property bill is as follows:
- land 500K

- improvement 300K

 

If I just use it, TurboTax will use 850K * 3/8 = 319K as the value of my improvements and the basis for depreciation. However, the county's tax assessment does not know about the 100K remodel. My question is how I deal with this? Add 100K on top of the 300K? Ignore it?

 

EDIT: also this is CA, so with the prop 13 the tax assessment is normally not up to date esp wrt land value.

 

Thank you!

 

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1 Best answer

Accepted Solutions
PatriciaV
Employee Tax Expert

Rental depreciation: property tax improvement might be inaccurate?

Yes, the adjusted basis of a rental converted from personal use would be your entire cost of the property ready to be rented. This would include any improvements/repairs done before it was listed for rent. For depreciation purposes, you would reduce this basis by the cost of the land (allocated if necessary).

 

@hz2020

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5 Replies
PatriciaV
Employee Tax Expert

Rental depreciation: property tax improvement might be inaccurate?

The assessment report is used as a guideline to help you allocate part of the FMV to the land. If you have additions that aren't included in the assessment, add that cost to the value of the assessed "improvements." Essentially, take your FMV after additions and subtract the land value. This should be your depreciable value.

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Rental depreciation: property tax improvement might be inaccurate?

Thanks. Yeah what you said makes sense, but the way TT's "New rental property worksheet" is structured, it does not allow me to enter a depreciable value that I choose. Instead, it asks for my property tax bill and calculate the final value by ratio.

 

Do you mean that I should work it backwards and calculate the land/improvement percentage from the real value I want?

 

I *think* my depreciable cost is "original cost (from tax bill in the year of purchase)" + whatever improvments I made on the house (assuming this part is far less than FMV).

MarilynG1
Employee Tax Expert

Rental depreciation: property tax improvement might be inaccurate?

If you go directly to the Assets/Depreciation section under Rentals, you can enter whatever values you want on the Asset Entry Worksheet for your Rental Property/Land.

 

You're not required to use the New Rental Property Worksheet.

 

The property tax bill is just a guideline for you to allocate % of total value between building and land.  

 

Basically, your depreciable value is what you paid for it, plus cost of improvements (minus land value). 

 

@hz2020 

 

 

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Rental depreciation: property tax improvement might be inaccurate?

OK, it does appear that if I simply put the "original purchase price + improvement cost" in the cost of "Tell me about this rental asset", it'd take it and use it as the adjust basis. This seems to translate to the "Asset Entry Worksheet" line 4: Enter the total cost when asset was acquired. This description gave me pause, but I cannot find anywhere else it'd ask for separate improvement costs (unless I enter it as a separate asset).

 

Is this how we enter this for converted rental?

 

PS: I am using TT Premier.

PatriciaV
Employee Tax Expert

Rental depreciation: property tax improvement might be inaccurate?

Yes, the adjusted basis of a rental converted from personal use would be your entire cost of the property ready to be rented. This would include any improvements/repairs done before it was listed for rent. For depreciation purposes, you would reduce this basis by the cost of the land (allocated if necessary).

 

@hz2020

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**Mark the post that answers your question by clicking on "Mark as Best Answer"
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