Figuring tax deductions on rental property

George SaenzDear Tax Talk,
I have two questions in regards to rental properties. On June 30, 2010, I moved out of my primary residence that I owned and rented it out July 1, 2010.

First question is, how do I determine the value of the home to calculate the depreciation? I purchased the property in 2007 for $192,000 and lived in it until June 30, 2010. Of course the value has dropped, since it's a Florida property. But what does the IRS use to determine the value?

Second question is, since I lived in the property for six months and rented it out for six months in 2010, can I only depreciate and write off expenses for six months? I'm assuming that is how it's done, but cannot find anything to detail that for me.

Thank you for your time and advice.
-- Britt

Dear Britt,
When you convert a personal use asset to business use, such as a rental activity, your basis for depreciation is the lower of the asset's cost or fair market value. FMV can be determined by an appraisal or from looking at comparables (look at If the home's value declined to $100,000, that would be your basis for depreciation as well as determining any loss -- but not gain -- on its sale. If the property is a house versus an apartment, you would need to allocate part of its cost to land, which would not be depreciable.

Assume you determine that the land is worth $20,000; in Florida, your local property appraiser's website or tax bill is a good source for determining relative land and building values. Your depreciable basis is then $80,000. Looking at the charts (table A-6 for 27.5-year residential real estate) for property placed in service in the seventh month of the tax year, the depreciation percentage is 1.667 percent or $1,333 ($80,000 x 1.667 percent).

In 2010, you must divide your yearly expenses, such as taxes and insurance, between rental use and personal use. You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes.

You cannot deduct depreciation or insurance for the part of the year the property was held for personal use (i.e., up until June). However, you can include the home mortgage interest, qualified mortgage insurance premiums and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A. Any direct expenses incurred after June such as repairs, utilities, landscaping or maintenance would not be prorated but rather a rental expense. If you incurred advertising expenses relating to offering the unit for rent, you would include those as a rental expense even if prior to July.

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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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