We have converted our home that we lived in to rental property in 2016. We are in California on P. 13 so the values on our tax bill are low. Do we use fair market value?

[fredifizzx]

That would be under California Proposition 13 so our house and land values are very low on our tax bill.  Would we use fair market value minus land value percentage for cost basis in this case?

[fredifizzx]

That is cost basis for depreciation allowance.

[TaxGuyBill · Accepted solution]

You use the lower of (1) your Adjusted Basis (usually original purchase price plus cost of improvements) or (2) the Fair Market Value on the date of conversion to a rental property.

If I understand your situation, that means you would probably use your Adjusted Basis for depreciation.

If you do not know the cost of the land when you purchased it, then your tax bill values could be helpful to determine the ratio of land versus the entire cost.  For example, if your tax bill shows a total value of $100,000 and $20,000 of that is for land, that would be 20% for land.  So you would take your actual purchase price (or Fair Market Value, if that is lower), and estimate 20% was for land.  Does that make sense?

[fredifizzx]

Would the cost be the amount that we last refinanced it for?  Like in 2013 we refinanced the property at around $200,000.  Would that be the cost?  My wife originally bought the property in the
50's for $27,000 and of course improvements were made after that.

[TaxGuyBill]

No, refinancing or your mortgage has nothing to do with it.

You would start with $27,000, and add the cost of any improvements that were NOT replaced.  For example, if you paid $1000 for a new roof in the 1970's, and then you replaced the roof again in the 1990's for $5,000, you would only add the 'newest' improvement (the roof for $5000).

The most common improvements include roof, furnace, central AC, remodeling, additions, etc..

[fredifizzx]

Thanks.  If that is the case then the cost basis will be close to what is reported on our tax bill.

[TaxGuyBill]

I should also ask this:  Is your wife still alive?  Was it ONLY ever owned by you and/or your wife (or were there former spouses involved)?


Are you planning on selling the property in the next couple of years?  If not, be aware that you will no longer qualify for the $250,000 ($500,000 on a Joint tax return) tax exclusion when it is sold.

[fredifizzx]

Wife is still alive.  She had a former spouse.  We were married in 1991 and we both have owned the house since then.  Was planning to sell but might just keep renting it as this looks like it might be a good way to reduce taxes.  We just bought another house in N. California that we now live in.

[TaxGuyBill]

Did your wife get a divorce from her former spouse, or did the spouse die?  If he died, that changes things.

[fredifizzx]

Divorce.

[TaxGuyBill]

Okay, then my original answer stands.

[fredifizzx]

Thanks again.  I'm just going to use what is reported on our property tax bill for cost basis.  It works out OK as we get a refund instead of having to pay.