Depreciation Value for Home Converted to a Rental Last Year

[Ukimagic71]

This is my first rental, so this is the first time depreciation will be part of my taxes.

First, my understanding of calculating the value of just the home, not the land, is to start by looking up the latest tax assessment, which breaks down the value of land and the home.  I would then calculate what the percentages are for the land and home from that and then use those percentages against the purchase price, to get just the home's value.  Is that correct?  So if the tax assessment home price is 80% of the overall value, I would take 80% of the purchase price as the home's value for depreciation.

Then, I am allowed to add any improvements I made to the home to the purchase price.  Is that correct?  I did all the work myself, so I didn't pay for labor.  I am wondering if the value of the improvements is greater than the money I put into them.

Along those lines, I attempted to get PMI removed about a year before it became a rental, which required an appraisal.  Can I use that value (subtracting out a % for the land) when entering in the value for depreciation?  

[JamesG1 · Accepted solution]

Your computations appear to be related to your adjusted basis computations.  These computations are not unreasonable.

For instance, the determination of the 80% improvement - 20% land is a reasonable stance and is tied to the original purchase price.

You may include the cost of improvements into the basis calculations.  The cost of your own labor may not be added into the cost.  For instance, if I paid a carpenter $10,000 to build a deck, the cost basis of the deck as an improvement would be $10,000.  If I paid $4,000 for deck materials and built the deck myself, the cost basis of the deck as an improvement would be $4,000.

Assuming the appraisal has sufficient detail, the appraisal for purposes of the PMI change may be used.  I would also review the valuations from the online services to see whether the numbers are similar.

IRS Publication 551 Basis of Assets, page 10 states:

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.

Basis for depreciation

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

• The fair market value (FMV) of the property on the date of the change, or
• Your adjusted basis on the date of the change.