VA-Financed Loan and Cost Basis for a Personal-turned-rental Property

[ADARBlandlord]

We have a home that we purchased and resided in, while on active duty orders, using a VA-financed loan. The funding fee was rolled into the loan amount, so my mortgage paperwork includes that in the loan amount.

We also refinanced several years ago, during the big interest rate dip after c-d, so we have a new loan amount.

Since moving forward into Veteran/civilian life, we have moved and purchased a new home, keeping the old home as a rental this past year. (Yes, we lived in the home plenty long enough to convert it, even after refinancing). 

We are not trying to figure out our landlord taxes and cannot seem to find the answer to this question: which amount do we start with for the cost basis to calculate depreciation??

• Again, the home was purchased with the funding fee rolled in, so the loan amount reflects that. 
• It was refinanced (with a new funding fee), so the new loan amount is different.
• Renovations were done (flooring, kitchen remodel, roof), so those will be included.
• The land is not depreciable, so that will have to be figured out too—though our county does NOT have any records for assessment of the home or land, so I'm not sure which ratio to use to calculate this, …or if we include the loan amount or somehow figure out the loan amount minus VA funding fee (so I guess that's a second question).

Which amount do I start with, and which do I use for calculating the land, and which (if you want to answer that bonus question) ratio would I use to calculate the amount allocated to land if the county has no information for this?

Thank you!

[Carl]

How you financed the property purchase and the fact you did a refi is irrelevant in determining the cost basis. You cost basis of the property is the "LESSER" of

1) What you paid for it when you originally purchased it or;
2) the FMV of the property on the date it was placed in service.

While not impossible, it is very doubtful the property was worth less when you converted it from personal use to a rental, than what you paid for it when originally purchased. So you cost basis will be what you originally paid for it when you purchased it. This has nothing to do with what you borrowed from any lender. Typically, your original purchase price is listed in the sales contract you signed obligating yourself to pay the sales price to the seller, that you agreed to pay in said sales contract.

[ADARBlandlord]

Okay, so that's what I've read a lot, but then things say to look at your home documents. My home documents show the total with the funding fee added. Are you saying I need to go see what we agreed to buy the house for, ignoring the actual loan documents (this isn't on my actual loan documents for some reason, but I do have a paperwork trail I can look through). This is what I had assumed I'd go by, but I want to make absolutely sure so I don't do anything wrong.

I'm sure the FMV is not less, because prices skyrocketed since. Unfortunately, we've talked to the assessors and everyone else we could in the county, and no one knows how to get any assessment information. It's not on the county website either for our property. I'm not sure how they determine taxes, honestly lol, and they don't seem to know either. I can just go off of general prices of similar homes in the area for that one.

This all being said, I've also seen things saying I can write off the VA funding fee. Obviously we didn't pay if off at once, and that was years ago, but there was something mentioned about a yearly cost paid I can write off? I don't even know how to figure that out (also not on my mortgage paperwork…at least that I can tell). Any ideas on this? 

Thanks so much!

[Carl]

Your cost basis on the property is

What you paid for it when originally purchased as shown on your original sales contract you signed, plus any fees you paid associated with that original purchase. The fact you may have borrowed money to pay for any of it is irrelevant.
For example:

You contracted with the seller to pay $200,000 for the house.

You put $40,000 down and took out a loan for $160,000.  This changing nothing "AT THIS POINT".

You paid $5000 in closing costs. Now your cost basis in the property is $205,000.

The fact you borrowed money to pay "any" of it is irrelevant. Your cost basis is $205,000.

If you paid "points", which is basically interest you paid in advance, that gets added to the cost basis. Take note that points paid is sometimes separate from interest paid for the period of time between the closing date of the purchase and when your first payment is due.

Typically, your cost basis is the total amount paid on the closing date of the purchase. It does not matter if it was paid with money out of your pocket, or with money you borrowed.

Where these numbers are on your closing documents depends on what flavor/version of the ALTA statement you were given at the closing. There are four types of ALTA statements. To determine which you have see https://atgtitle.com/what-alta-statement-is-how-it-works/

[ADARBlandlord]

Thank you, but that is all irrelevant to what I am actually asking, so I believe you are misunderstanding what I am asking. My mortgage paperwork (mortgage meaning "money borrowed to buy the house") INCLUDES the VA funding fee. Somewhere along the line it shows the purchase price by itself, but the actual paperwork under "Type of Mortgage and Terms of Loan" shows the total that includes the funding fee.

Nowhere did I mention using points, taking out a separate loan, paying a downpayment, or any of that. This was a VA-financed home where all we had to pay OOP was the funding fee, which was actually rolled into the home cost and not paid at that time. No points. No money down. No closing costs (besides the funding fee).

Typically that funding fee would have been a write-off when we purchased the home, had we paid it outright at that time, but it was instead rolled into the mortgage, so that changes things. It's not "technically" the same as typical closing costs. It's its own thing. So I don't know how to count that.

I was simply asking if I need to use the home purchase price number by itself or just use the amount shown on my mortgage terms paperwork that happens to include the VA funding fee. These are not the actual numbers, but say the home price agreed on was $120000 and the funding fee was $2000 (no other money involved), so I use $120000 or $122000? I'd assume $120000 and that I also use that when making a land value estimate; but when I do a Google search, AI tells me I use the amount that *includes* the funding fee, …but I will never trust AI to give me the correct answer. That's why I came here. All other resources that come up answer any other question I could ask except the specific thing I'm looking for, at least no clearly. 

[Carl]

You include the funding fee in the cost basis of the property.