Author Topic: Changes to basis/depreciation schedule when moving out of multifamily  (Read 633 times)

mrdaniel

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Hi everyone,
I have been following these forums for a while and now have a pretty specific question...

In January 2016, we  moved out of a 3-unit apartment building where my family lived in one unit, into another home. So the building has gone from being 1/3rd owner-occupied to a 100% rental.  The question I have is about how to handle the depreciation -- whether I can update the cost basis to the FMV at the time it became a 100% rental, and if so, whether I even want to.

Just to use real numbers to keep things more clear, the basis of the house  when we bought it in 2013 was $264,904.  In 2013, 2014, and 2015, for depreciation, I used $8978, the full depreciable amount  - this was the advice of our accountant at the time (he has since passed away, and now I'd like to try to do my own taxes).

Now that it's a rental all the way through, do I still just use the $8978 amount? Or is there an opportunity here to calculate another cost basis for the building? I have seen the latter suggested with condos that switch from owner-occupy to rental, but I'm little unclear whether our situation of having one unit in a multifamily changes how to do things, since we have already been paying depreciation.

And if a new basis is an option, then there's the question of if I even want to switch. Although switching to the higher basis would give me more cash in the short-term (higher annual depreciation), is this going to hurt me later because I'm going to pay 25% on all the recapture when I sell? Would it be better to keep the lowest basis justifiable, so that I'm paying less of the 25% rate on recapture, and more of the 15% rate on capital gains?  (We are currently in the 15% tax bracket, though would likely, but not for certain, be in the 25% tax bracket when we sell).

I also have one other related question. We did some capital improvements while we lived in our unit (a bathroom remodel) the year before moving out.  Now that the property is a 100% rental, can I depreciate those expenses? Can I add them to the basis? Or, since they were done while it was not under rental, are they ineligible?

Thanks in advance!