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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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I am confused regarding determining the cost basis a rental

Customer Question

I am confused regarding determining the cost basis for depreciating a rental property that has been converted from personal use.
In 2001 we purchased a condominium for $ 157,500 ( $ 126,000 additions and improvements and $ 31,500 land). Since then we have spent about $ 100,000 in improvements and upgrades) making the theoretical cost basis about $ 226,500 using this option. Unfortunately, we have failed to keep documentation of our expenses since we never intended at that time to rent or sell this property.
The city tax assessment for this property is now $ 212,000 ( $ 169,000 additions and improvements and $ 42,400 land)
We have recently put the property up for sale at $ 315,000 which realistically reflects the true market value according to surrounding comps and agent input. The market is a little slow here and we were thinking of keeping it as a rental property.
The question is: What is the proper way to determine the cost basis of this property, for depreciating it, at the time of conversion. 1) is it possible to have an independent property assessor assess the current value of the property and use this as the cost basis?
2) can you use the local government property assessment (which is much lower that true market value), 3) Am I required to use the original cost ( 14 years ago) plus improvements (for which I do not have proper documentation). The latter would also be considerably less than true market value.
Submitted: 1 year ago.
Category: Tax
Expert:  emc011075 replied 1 year ago.

Hi. My name is ***** ***** I will be happy to help you.

To determine basis for depreciation, IRS is very clear. You have to use LOWER of your adjusted basis or Fair market value of the property on day of conversion. You can use an independent property assessor or the local government property assessment but you will still have to compare it to your adjusted basis (purchase price plus improvements) and use the lower one.

I am sorry if that's not the answer you were hopping for. If you don't have proper documentation for all the improvements, you can use an reasonable estimate as long as you document how you figure out the basis.

See IRS publication:

Basis of Property Changed to Rental Use

When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion.

https://www.irs.gov/publications/p527/ch04.html#en_US_2014_publink1000219151

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