Tax questions regarding rental property

[nachos31]

I have some specific tax questions related to filling out Schedule E and Form 4562 (depreciation) for a rental property:

How do I calculate the basis for a home purchased in 2005 that I moved out of and put up for rent in 2012? Would the basis when the home first went on rent in 2012 have been the same price that I paid for the property in 2005 (minus the cost of the land, as that is not supposed to be factored into basis)? Or would the basis have been decreased from 2005 to 2012 for depreciation during that time period? If so, how do I calculate that? Using the same MACRS depreciation percentage table?

Similarly, for a residential rental property, the recovery period is 27.5 years--is this from the time the home was built, or is this from the time the home was placed "in service" (ie started to rent out)? For example, am I in recovery period year 11 (if counting first year as 2005 when home was built) or am I in recovery period year 4 (counting first year as 2012 when it was first rented)?

Finally, if I'm 33% owner of the rental, how does that effect the MACRS deduction--do I just divide the number I get by 3 (eg, multiple by 33%) to get my portion?

This is the first year I'm doing my own taxes and do not understand how in years past the folks that prepared the taxes did things, thus my confusion and trying to start from the beginning.

Would appreciate any input, cheers!

[The White Coat Investor]

Every year there is a topic that I become very knowledgeable about with regard to my taxes. A few years ago when I started renting my property I looked into this. This year I sold it, so I'll need to look into it again. But I haven't yet done so as I won't be doing my taxes for another month anyway when the K-1s start showing up. So this advice is worth exactly what you're paying for it.

1) You're supposed to use the basis starting when it became an investment property. But how that is determined is a pretty gray area, so obviously pick the method that favors you the most. You should have come up with a basis a few years ago, no? Look back at your 2012 taxes.

2) I believe it is from the time it became a rental property. That doesn't necessarily mean the first date it was rented.

3) I believe so.

[jfoxcpacfp]

nachos31 wrote:

I have some specific tax questions related to filling out Schedule E and Form 4562 (depreciation) for a rental property:

How do I calculate the basis for a home purchased in 2005 that I moved out of and put up for rent in 2012? Would the basis when the home first went on rent in 2012 have been the same price that I paid for the property in 2005 (minus the cost of the land, as that is not supposed to be factored into basis)? Or would the basis have been decreased from 2005 to 2012 for depreciation during that time period? If so, how do I calculate that? Using the same MACRS depreciation percentage table?

Similarly, for a residential rental property, the recovery period is 27.5 years–is this from the time the home was built, or is this from the time the home was placed “in service” (ie started to rent out)? For example, am I in recovery period year 11 (if counting first year as 2005 when home was built) or am I in recovery period year 4 (counting first year as 2012 when it was first rented)?

Finally, if I’m 33% owner of the rental, how does that effect the MACRS deduction–do I just divide the number I get by 3 (eg, multiple by 33%) to get my portion?

This is the first year I’m doing my own taxes and do not understand how in years past the folks that prepared the taxes did things, thus my confusion and trying to start from the beginning.

Would appreciate any input, cheers!

Click to expand...

With all due respect, you are in over your head. There really are some times that an expert is worth the money, especially considering the time you'll spend on this that you could be doing other things :-)

Now that that's off my chest, I'll do the best I can:

1. The basis is the value at the time you put it into rental, but cannot be more than you paid for it. You need to allocate an amount to the value of the lot, which is nondepreciable.


2. The recovery period begins with the date you began renting the property. This is likely irrelevant as the depreciation will be the same for every year but the first and the last and it's unlikely you'll hold the full 27.5 years.


3. The rule for depreciation is "allowed or allowable" meaning that, when you sell the home, you have to recapture depreciation you didn't deduct if you overlooked the first 3 years of rental. You need to catch up on any depreciation you have not yet taken. The IRS published an exception to the rules for having to go back and amend, several years ago, which is a benefit to you if you're behind.


4. Yes, you will divide by 3. Technically, what you have is a joint venture but you might consider an LLC/partnership. Not worth risking your personal assets on something happening with a residential rental, imo.

Hope this helps.

 

[nachos31]

Thanks for the responses. The part I was struggling with was that the basis used in 2012 seemed randomly generated. I did some more detective work and finally figured out what the tax preparers did in 2012 and how they got their numbers. Let's just say if you thought I was in over my head, then you'd feel the same way about the tax preparers--I don't think these guys had any idea what they were doing. Yes this took some time to figure out, but I'm glad I understand it now moving forward.

[jfoxcpacfp]

nachos31 wrote:

Thanks for the responses. The part I was struggling with was that the basis used in 2012 seemed randomly generated. I did some more detective work and finally figured out what the tax preparers did in 2012 and how they got their numbers. Let’s just say if you thought I was in over my head, then you’d feel the same way about the tax preparers–I don’t think these guys had any idea what they were doing. Yes this took some time to figure out, but I’m glad I understand it now moving forward.

Click to expand...

Actually, I feel that way about a lot of tax preparers. It is scary what an unlicensed preparer can do to their clients - and many people think they are dealing with a CPA when they're not so the ignorance goes both ways. otoh, I've seen some amazing creativity on S-corp returns by CPAs.

Always fun to figure out a puzzle - glad you were able to do so.