The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: ENL on February 20, 2015, 08:30:05 PM
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I bought a home in 2007. Refinanced in 2012. We have done some updates over the years, mostly right after moving in in 2007 and in 2014 when we were trying to sell it for a time. Selling did not go well and we decided to rent it out instead starting in Dec 2014.
I am doing my taxes in TurboTax and am getting confused about some of the information it needs. Being a new landlord, it is kind of throwing me for a loop that doing our taxes now needs some information from previous years. (I'm assuming because TurboTax needs to now how figure out the depreciation of the home.) So it is not clear to me on a couple places how far back it wants me to go when providing information.
For example, there is a section asking me to enter the cost of any improvements made before the place was converted to a rental, but it doesn't specify how far back I should go. Any upgrades after buying the property? this year? since we seriously started trying to find renters in November?
I'm also confused about the section that asks about my refinancing closing costs, since the refinance happened in 2012. I don't know if it is only interested in refinances that happened this year or not.
The TurboTax help has not been terribly helpful. I know some might say to turn this over to a CPA, but I'm am not comfortable with that after getting burned by one in the past. Does anyone have any advice or resources to help me understand what is going on with this aspect of my taxes?
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You really just need to define the cost basis for depreciation. It was placed in service the date it was rented. The cost is the tough variable. I would add up the following:
Original cost
Major improvements before rental date
This will cover 95% of your cost basis, so that's your "purchase price".
Depreciate the cost over 27.5 years.
This will reduce your annual income, and also reduce your cost basis so when you sell you will likely pay tax on the depreciation. Don't worry about that now. Take the deduction.
Turbo tax can drown you in questions. Ignore that shit. The refi is virtually irrelevant. Just get that data in there and make sure it's accurate. It will show up on form 4562 if you did it right. And the depreciation will show up near the bottom of the schedule e.
Post more questions if you have to, I have answers.
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My questions right now are:
Why is TurboTax asking me about my closing costs? How is that information relevant?
Why is TurboTax asking me for both the original purchase price and market value of the home when it was converted to a rental? Wouldn't you only need one to determine the value of my home?
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Some closing costs are tax deductible for a personal residence.
All closing costs are deductible (or included in your cost) for a rental property while it's a rental property. The ones paid a long time ago might add to your costs basis.
Purchase price vs. Market value. Technically I'm 99% sure your "cost basis" on the property when placed in service is the lesser of your actual cost or the fair market value. Total bullshit in my opinion. I think it should be one or the other, or the greater one, not the lesser one. Your call on what to use. Under IRS audit, lesser of cost or FMV.
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I was in the same situation as you 4 years ago. Bought in 2007 and couldn't sell in 2010, so we've rented ever since.
For cost basis, I just used the purchase price. It is anyone's guess what "market value" was on the day I decided to rent. I could have added upgrades, but they were insignificant compared to the purchase price.
You cannot depreciate the portion of the cost basis attributable to the land, only the structures. To figure the land, I went to the county property assessor's website and subtracted the county's value of the land. Again, it's anyone's guess what the structure was worth on the day I decided to rent.
Renting was an excellent choice. The house makes positive cash flow and the expenses and depreciation deductions wipe out any tax. If your total AGI is below $100k, you can offset up to $25k of passive losses against other income. This phases out to $150k AGI.
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I was in the same situation as you 4 years ago. Bought in 2007 and couldn't sell in 2010, so we've rented ever since.
For cost basis, I just used the purchase price. It is anyone's guess what "market value" was on the day I decided to rent. I could have added upgrades, but they were insignificant compared to the purchase price.
You cannot depreciate the portion of the cost basis attributable to the land, only the structures. To figure the land, I went to the county property assessor's website and subtracted the county's value of the land. Again, it's anyone's guess what the structure was worth on the day I decided to rent.
Renting was an excellent choice. The house makes positive cash flow and the expenses and depreciation deductions wipe out any tax. If your total AGI is below $100k, you can offset up to $25k of passive losses against other income. This phases out to $150k AGI.
Usually your assessment is much lower than your actual basis so instead of subtracting the land value, you should figure out the percentage. For example, if my assessment is $175,000 with $50,000 being land that is 28.57% land. So 100-28.57% times my cost of $250,000 is $178,575 to depreciate, not $200,000 ($250,000 - the assessed $50,000)
Directly from IRS.gov -
"Example.
You buy a house and land for $200,000. The purchase contract does not specify how much of the purchase price is for the house and how much is for the land.
The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land.
You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land.
Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000)."
http://www.irs.gov/publications/p527/ch02.html
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Some more questions:
TurboTax help recommends using the State Equalized Value to determine fair market price and further goes on to say to use the information on your property taxes to figure out the value of the land. Is this really acceptable? I assume this is not the best way of doing it? I'm getting conflicting info on what IS the best way.
Also, am I correct in understanding that improvements made a few months before putting the place on the rental market out only count when figuring out the cost basis of the home (and not towards the improvements I list to determine my deduction)?