What is the basis for rental property depreciation when ownership is acquired via foreclosure on a private mortgage.

[jhb333]

We were the holders of a private mortgage.  Due to non-payment, we were forced to foreclose and thru that process ownership of the property was transferred to us.  We have now turned this property into a rental property.  Can we depreciate this rental property and, if so, how do we determine the basis for the depreciation?

[Critter]

If you were holding the mortgage on the property then the basis would be the unpaid balance plus any cost to transfer the title. And you must depreciate the property, that is not an option.

[TaxGuyBill · Accepted solution]

The basis of the property after you repossessed it is the same as what your basis was before you 'sold' it.   You must also claim the payments that were made as income.

https://www.irs.gov/publications/p537/ar02.html#en_US_2014_publink1000221753

The depreciable basis is the lower of (1) your basis and (2) the Fair Market Value when converted into a rental property.