In what year should I record as a starting date for depreciation and for what adjusted cost basis?

[sdavis3625]

I’m doing my 2024 taxes:  In what year should I record as a starting date for depreciation and for what adjusted cost basis?

I purchased a house in 1977 for $45,500, rented the property from 1984 until 2008, In the middle of 2008, my daughter moved into the home, she was not paying rent.

In 2013, I obtained building permits and made $255,000 in improvements/addition.   In October 2016, my daughter moved back into the home, when I obtained closure of my final building permit. 

 In August 1, 2016, my daughter temporary moved out of the home to earn her degree in another state.  I then had an individual stay in the home who did not pay rent at the market rate so I reported monies received as other earned income on line h 1040SR, never used Schedule E, did not depreciate, and never reported my losses. My daughter was planning to move back into the home after obtaining her degree, we wanted an house-sitter.

In 2020, COVID hit and the house-sitter stop paying the fee and finally moved out of the home on May 28, 2023.  In February 2024, I found a tenant who is now paying market rate rent.

When calculating depreciation for my 2024, taxes, do I say my business started in 1984, and depreciate $18,500 ($45,500 minus prior reported depreciation of $27,000,) and add the $255,000 as an added asset to begin depreciation in 2016, OR do I record $18,500 starting in1984, and add the $255,000 as an added asset in the year 2024, when I began receiving market rate rental income? 

[Vanessa A]

No.  You would not say you started depreciating in 1984, this would cause the house to be fully depreciated.  It sounds as though this house has not actually been rented since 2008

What you will do instead is use the basis and then depreciate starting in 2024 when you finally started renting the property. 

Your basis will be the $45,000 minus the $27,000 of depreciation already taken plus the $255,000.  This will be done as ONE asset/property to depreciate instead of tracking it separately.

When or if you ever sell the house, you will then recapture the depreciation that you took prior to 2008 along with any additional depreciation you accumulate from now until it is sold. 

[sdavis3625]

Pertaining to the community advise I'm requesting a response to one additional question:  How do I show a csot basis as one asset/property when using Turbo tax it  specificially wants  identified the "original  purchase price" and purchase date of the rental properlty, which would be my $45K.  Then the program states specifically that any improvements should be added as an "added Asset".  I understand the $45K will be fully depreciated, but Turbo tax has not made allowance to record the $45,000 - $27,000 + $255,000 as one asset/property at the "original price".  Have I missed something?

[PatriciaV]

Since you are entering the cost of the rental property on the most recent date you placed it into service, the "purchase price" would actually be the total of the depreciated basis ($45K - $27K) plus the renovations ($255K). You will enter only one rental asset for depreciation.

Note that the property was no longer considered a rental during the period when you had no tenants paying fair market rent. Instead, it became personal property.

According to IRS Pub 551 Property Changed to Business or Rental Use: 

If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. An example of changing property held for personal use to business use would be renting out your former main home.

The basis for depreciation is the lesser of the following amounts.

• The Fair Market Value of the property on the date of the change, or
• Your adjusted basis on the date of the change.

The best source for the Fair Market Value (FMV) on the date of the change would be a local real estate agent who can provide comparable sales. This is good evidence for the value of your home on that date.

As stated above, your adjusted basis is the original purchase price plus any improvements (upgrades or additions) that you have made. In most cases, your adjusted basis would be less than the FMV, so that is the basis you would use for your Rental Property.