Cost basis and cost of land for property in foreign currency

[Guille12]

Hi,

I own a property in Europe that I bought in 2018 and I have been renting since then. Since the rate Euro-Dollar changes every year, I have been changing the cost basis and the cost of land every year ,adjusting them by the exchange rate. I believe these values are used for the depreciation calculation.

So for example if I bought the property for 100,000 eur and the exchange rate that year was 1.1. I inputted 110,000 usd. But if the next year the rate was 1.2, I changed the cost basis to 120,000 usd.

Is this the right way to do it, or should I keep it constant for the exchange rate of the year I bough it?

Thanks.

[Vanessa A · Accepted solution]

No, you would not need to change the cost basis every year because the exchange rate changes.  Basically, in year one, when you started depreciated the property that is your cost basis.  That is the basis you will depreciate until you sell the property. When you sell the property, you would use the exchange rate on that date to calculate your gain or loss on the sale. Just like a property in the US, you would only adjust your basis when you do something such as selling it or making a major improvement to it.  Otherwise, what it started at is what it stays until you sell it. 

 If you have other expenses during other years, then yes, they would be calculated at the rate of exchange on the date of the expense. 

Sale of foreign property

[Guille12]

Thanks @Vanessa A . That makes sense. Since I have been chasing the value of the property, I guess the "prior depreciation" is wrong. Should I adjust it in the 2022 tax return?

If so, would this be the right way:

For example, cost of property $100k, cost of land $20k. I started renting it in Dec-01-2018 (full month).

So the depretiation per year would be $80k/30 = $2,667 per year (30 years depreciation because it is a foreign asset).

And the depreciation for one month $2,667/12=$222

The depreciation for the 3 year period 2019-2021 would be 4 x $2,667= $10,668

Plus the single month in 2018 - $222.

So the total accumulated prior depreciation to be input would be: $10,890?

[DianeW777]

Yes, you are using the correct method and an adjustment should be made going forward.  When you reach the prior depreciation screen you must enter the actual amount of depreciation you did use for the past years. 

One correction in your formula is that 2019, 2020, 2021 = 3 years as opposed to the '4' you used in your scenario.  Three full years and one month in 2018 would equal $8,222. 

The current year depreciation, 2022, would be $2,667 as you indicate for the annual amount. 

[Guille12]

Thanks @DianeW777. Yes, it should be 3 years.

But then, the figure to be added in Prior Depreciation is the sum for the depreciation used in the previous years tax returns, not what it should've been with the correct calculation. Could you confirm that?

[ErnieS0]

Yes. Enter the actual amount of depreciation claimed in prior years. TurboTax will compute the correct deprecation going forward.

You can also amend your 2019, 2020, and 2021 returns to claim the correct deprecation based on the cost basis on your 2018 return, though that would be a more complicated process.

 See How to Correct Federal Tax Returns and How do I amend my federal tax return for this year?