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taxman007
New Member

Rental Property Cost Basis & Safe Harbor for small taxpayers

Hello,

 

I bought a property in 2020, had it for personal use for a month and converted to 100% rental since then. I had a few things I’m unsure about:

 

1) My 2020 real estate assessment showed building value as 570 and land at 37k. Purchase price was close to assessment, so I took depreciation on 570k in 2020. However, 2021 real estate assessment shows building value reduced to 537k and land value at 80k. Do I need to go and adjust/lower the basis for 2021 and beyond and take lower depreciation, or do I continue taking depreciation on the original 570k? 

2) I replaced my AC and furnace unit in 2021, total cost including labor was $6k. I read that I can expense it (and not capitalize) under the safe harbor election for small taxpayers. I’m not sure if by using this election I’m self-declaring my rental property income to be a business? I am on an employment visa in the US and thus need to keep my rental property income as a passive investment to comply. 

3) I originally bought and kept the property for personal use (for 1 month). Can I claim any of the original settlement/closing fees on a pro-rated basis since I converted to rental after 1 month? Or am I not allowed to claim at all since I paid those when property was bought and kept under personal use at time of closing? 

Thanks for reading! 

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1 Reply
LeonardS
Expert Alumni

Rental Property Cost Basis & Safe Harbor for small taxpayers

To answer your questions in the order asked:

 

1) Your basis is set on your purchase price, not the assessed value.  You may use the assessed values to determine what the portion of the land value and house value is then apply that percentage to your purchase price for the starting basis to use for depreciation.

 

2) No, by using this election you are not self-declaring my rental property income to be a business.

 

3) You may add the full amount of the cost of your allowable home expenses that you paid in connection with the purchase, including attorney's fees, abstract fees, owner's title insurance, recording fees and transfer taxes.  They do not have to be pro-rated.

@taxman007

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