Dear Tax Talk,
Is there any way to use an appraisal as the basis for depreciation for what is now a rental property? I lived in the house for 15 years, so the value when it was placed in rental status is quite a bit more than the value when I purchased the property (bigger deduction). Of course, I’m referring to only the structure value, not the land value.
— G

Dear G,
That’s not how it works when it comes to depreciation. When you convert a personal asset such as your home to business use, the basis for depreciation is the lower of fair market value or its original cost plus improvements. It doesn’t matter how long you’ve held the property.

In determining the relative cost of the land and the structure, you can use current values to make the determination of which portion of your original cost to depreciate. As you kind of indicate, only the cost of the structure is depreciable. For example, if the land and the structure are currently worth $100,000 each, then half of your original cost plus improvements are depreciable. Any land improvements such as landscaping or paving would be depreciable over 15 years. The building is depreciable over 27.5 years.

When you sell your home that you have lived in and owned for more than two years within the last five years, you get to exclude $250,000 in capital gain ($500,000 for a married couple) from income. If you rent out your property for more than three years you’ll miss out on this exclusion. Since you’ve owned the home so long, the appreciation could be considerable and therefore it may not make sense to rent. I know it may not be the “right” market in which to sell, but you have to consider the tax implication of missing the capital gains tax exclusion.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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