How to calculate rental property depreciation for Schedule E, that was converted from residential to rental?

[anonymous8]

Here are some facts:

1. It's outside of the US (so I believe depreciation is 1/40, instead of 1/27.5 according to TurboTax)

2. It was purchased for $120,000 in 2013, as a residential apartment, I lived there for a few years.

3. I started renting it on Jan 1st, 2018. It was rented for the entire 2018.

I have a problem with "18 Depreciation expense or depletion" in Schedule E. Can I calculate it having information I listed above?

Unfortunately I don't have property’s fair market value from the time I started renting the apartment.

[Anita01 · Accepted solution]

You don't need to calculate this yourself if you have answered the questions correctly.  Make sure you enter a foreign address for the property.  As you continue on through the interview, you will come to a screen asking questions about the assets, where you need to check that the assets are in a foreign country, and that all of the assets are in that foreign country.  The program will select the correct depreciation rate and amount.

You will need to find a source for a Fair Market Value, especially important if the property has declined in market value.  If it has increased, you could estimate the current fair market value, since the lesser of cost or FMV is used for the depreciable basis.  You may find an estimate of changes in local market value over the relevant period of time on the internet.

[anonymous8]

I understand that TT will select the correct depreciation rate and amount based on my answers from the interview. My question was more like: "Will TT ask me about FMV of the apartment? Will TT need FMV of the apartment? Because I don't have FMV. I didin't order one when I started renting at the beginning of 2018".

[Anita01]

The FMV portion of your question was answered in the last paragraph of my answer.  

[anonymous8]

Thank you. So the FMV is necessary. The part that was not clear is, do I need FMV from Jan 1st 2018? Or FMV that I will get tomorrow will do? I think it's quite impossible to ask for a FMV in that past.. or isn't it?

[Anita01]

Unless something phenomenal has happened in that local real estate market in the last two months, today's value should bee fine.

[Anita01]

Oh, just saw Jan 2018.  A good real estate broker or appraiser would have no trouble giving you a current estimate and estimating how much that might have changed in the last year.  If prices are higher than the time purchase, the purchase price will be used anyway.

[anonymous8]

Thank you. It's almost all clear now. The only question is, if the prices are indeed higher today than a purchase price, will I still be asked to include FMV from Jan 2018 somewhere in the interview or in the tax return?

[Anita01]

Yes, the program doesn't know which of the two is higher until you tell ir by entering the numbers.

[kiowa716]

Have been depreciating residential rental since 2007. Total cost $250,000 - $152500 building and $97500 land.

Depreciation for 2020 should be around $5716 based on previous years of depreciation. It shows over $8000 if I use the $250K number or only $2000 if I use $152500. How do I get correct number?

[AmeliesUncle]

@kiowa716 

Are you entering a number for "previous depreciation"?  If so, what are you entering?  Try leaving that BLANK.

It should ask you for the total cost ($250,000) and also the land ($97,500). When you enter both of those, it will calculate the depreciation based on $152,500.

[Carl]

Just to clarify what is already stated in this thread.

 - Depreciation is based on the *lesser* of what you paid for the property, or it's FMV on the date it was placed in service. As I understand it, your original purchase price is the lesser, and that's what will be used for figuring depreciation.

 - Foreign residential rental real estate place in service *before* 2018 is depreciated over 40 years. If it was place in service in 2018 or after, then it's depreciated over 30 years. (Last I checked, the program was "NOT" selecting 30 years for property placed in service in 2018 or after.) In your case, it was placed in service in 2013 and has remained in service up to and including present day. So your depreciation is over 40 years.

If the 2019 tax year is your first year using TurboTax, all the data you need for the Assets/Depreciation section is on the two IRS Form 4562's from the 2018 return. There are two of them and they both print in landscape format. One is titled "Depreciation and Amortization Report" and the other is "Alternative Minimum Tax Depreciation". You'll primarily use the data from the first one.

When you enter the data into the Turbotax program, it will figure the "prior year's depreciation already taken" for you. On your 2018 form 4562 if you add together the amounts in the "prior years depr" and "current year depr" column, that total will be the amount entered into TTX 2019 for "prior years depreciation already taken". What the program figures may be a few bucks off one side or the other, and that's actually fine. But you can always change it to match exactly if you like.