Foreign Property Rental - depreciation calculation and currencty issues.

[marctax84]

In November 2017, I purchased a foreign condo through a program of preselling a condo being built in Philippines. During this time, all that was given to me was a Contract to Sell from the  Condo developer.  I made monthly payments until about August 2021 when I finished paying off the condo off completely in August 2021.  Several months after paying it off completely, the condo was finished, In January 2022, the developer had turn-over the  physical unit to me.  That same month, I purchased nearly $8000 of furniture/appliances so I could rent this condo. On March 2022, I advertised the condominium and received subsequent rental after getting it rented in July 2022 – through January 2023.  During the intervening time, the developer processed with condominium title and title was completed on January 2023.

I understand that I have to convert the value of the condo into USD dollar for the purpose of depreciation.  The Philippine peso fluctuated over a period of five years.

Do I convert the value of the condo based on currency  (from Philippine Peso to USD)from Nov 2017 (when I entered a contract to sell with Developer),  July/August 2021 (when I paid it in full), January 2022 (when I actually  Physical received the condo) or on January 2023 when the title was issued under my name?

Also can I depreciate the full cost of the condo + transfer fees + registration fees? I do not own the land underneath the condo (its my understanding you cannot depreciate the land)? The bulk of the payment in July/August 2021.

What about the $8000 in appliance I bought to rent this out as fully furnished rental? Can I depreciate this for 30 years as well (provided I have receipts)?

Also, its my understanding I can deduct from foreign rental income condo fees, cleaning fees, fees paid to agent for getting a renter? Is this correct?

[DavidD66]

You should use the conversion rate for the date you paid.  Going forward, you can use the conversion rate at the end of the year for all of your expenses that year, or you can covert each transaction as of the date it occurred.  

Yes, you can depreciate the "full cost" of the condo.  You can also depreciate the appliances, but you would depreciate them over 7 years, not 30.  If any individual items were less than $2,500 you can expense them by using the DeMiniis Safe Harbor Election.  And you can deduct your condo fees, cleaning fees, rental acquisition fees, etc.  And finally, you are correct, you do not depreciate land, which is a moot point with a Condominium, as they are not fee simple properties.

[marctax84]

Thank you for your insightful response, David. Over the course of 5 years  (November 2017 - to August 2021). I have been paying for the condo over a monthly basis with fluctuating currency exchange rate between USD to PHP.  Can I use the currency exchange rate from the final payment (august 2021) (over $100K) ?

[KrisD15]

The depreciation will be based on your cost. I would assume you would have records of how much in USD you spent to purchase the real estate if you were converting US dollars to PHP as you made the payments.

If not, for example you had foreign currency with which you paid, you would need to convert each payment in order to know what the value was when you no longer had control of those funds. 

For your US return, you would report what it cost you in US Dollars to purchase the condo and start the depreciation on that figure. 

Additionally, according to the IRS:

"Settlement fees and other costs.

The following settlement fees and closing costs for buying the property are part of your basis in the property.

• Abstract fees.
• Charges for installing utility services.
• Legal fees.
• Recording fees.
• Surveys.
• Transfer taxes.
• Title insurance.
• Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

The following are settlement fees and closing costs you can’t include in your basis in the property.

1. Fire insurance premiums.
2. Rent or other charges relating to occupancy of the property before closing.
3. Charges connected with getting or refinancing a loan, such as:
   1. Points (discount points, loan origination fees),
   2. Loan assumption fees,
   3. Cost of a credit report, and
   4. Fees for an appraisal required by a lender.

Also, don’t include amounts placed in escrow for the future payment of items such as taxes and insurance."