Tax Question

[pops]

In 2008, I bot a condo for $125,000 which I lived in until 12/31/2010. Fair market value on 1/1/2011 was 100,000. On 1/1/2011, I moved out and leased the condo out to a tenant.

So, the depreciable value of the condo is 100,000. Is the difference between my purchase price and the depreciable value a capital loss, or otherwise accounted for somehow?

TIA

[l3lackstatic]

You bought the condo for $125,000 in 2008, you started renting it in 2011. Your basis in the condo is still $125,000, so your depreciable basis on the property is $125,000 irrespective of the FMV of the property, given the facts you have provided.

[pops]

You bought the condo for $125,000 in 2008, you started renting it in 2011. Your basis in the condo is still $125,000, so your depreciable basis on the property is $125,000 irrespective of the FMV of the property, given the facts you have provided.

I think I disagree with you. When converting a property from personal use to rental, the depreciable value is the lower of the acquisition cost or the fair market value of the property at the time of conversion from personal to rental use. I have a pretty good understanding of that.

My question is how the difference between acquisition cost and fair market value at the time of conversion is then captured.

[Tinker Toy]

I would agree with I3lackstatic. Fair market value is only someone's estimate. It means nothing unless the condo was bought or sold at that price. Your starting point for depreciation is the original cost. If instead the fair market value at the time you began renting was higher than the buying price and you used that higher price as a basis for depreciation, I can guess that the IRS would take issue with that.

[pops]

I would agree with I3lackstatic. Fair market value is only someone's estimate. It means nothing unless the condo was bought or sold at that price. Your starting point for depreciation is the original cost. If instead the fair market value at the time you began renting was higher than the buying price and you used that higher price as a basis for depreciation, I can guess that the IRS would take issue with that.

FMV is someone's estimate, but it's required by the IRS when converting from personal use to rental. From 2008 until the end of 2010, the property was for personal use. You don't depreciate your personal residence, therefore, the purchase price isn't used. The FMV at the time the property was converted to rental is used.

Regarding your second sentence, the IRS is clear that the lower of FMV or acquisition cost is used. So, if the condo had appreciated in price, I would've used my purchase price. It dropped, so I use FMV.

Which still leaves me wondering how the loss in value between purchase price and FMV is accounted for.

[l3lackstatic]

Sorry Pops you were right per IRS website-

Basis of Property Changed to Rental Use

When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion.

But that leads me to think that the impairment loss that is caused by the difference in basis wouldn't be realized till the property is disposed of, or sold....I'll look into it more.

[l3lackstatic]

Ok so I found this article it might be useful to you, but from what I get you cannot deduct any loss at the time of conversion, you pretty much eat it.

Check out these articles
http://www.smartmoney.com/taxes/inco...ng-a-landlord/
http://real-estate.lawyers.com/blogs...-Property.html

[pops]

Thank you very much for the links. That's kind of what I was afraid of, that really sucks.

Anyways, cheers.

[Tinker Toy]

I'm going to be a little skeptical. The sites provided are not from the IRS and do not appear to provide references to IRS publications. IRS Pub 527 is not clear as to your starting cost when the condo is first made available for rent. I would certainly call the IRS on this one and if they also say that the present FMV must be used, then ask for an IRS Pub reference. It would be to your advantage to use the purchase price as your starting basis for depreciation. You were not allowed to depreciate your personal residence so the original price is what it cost you in an out of pocket dollar sense.

The need to get a firm, documented present FMV from a real estate agent does not seem like a hoop I would care to jump through. Would the IRS accept that in 10 or 20 years? That documentation would be too easy to get with a couple of 20s under the table. On the other hand, why would a RE agent want to stick his neck out to provide this for the IRS when there is no advantage for him?

I would ask: What would your starting basis for depreciation be if the property was in a declining area and was presently unsalable or worth nothing and yet you could still rent it out? The original cost?

[l3lackstatic]

It was in publication 527--

Basis of Depreciable Property

The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity.

If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property.

Basis and adjusted basis are explained in the following discussions.



If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its fair market value when you change it to rental use. See Basis of Property Changed to Rental Use in chapter 4.

Chapter 4 States
Basis of Property Changed to Rental Use

When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion.

Fair market value. This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property.
Figuring the basis. The basis for depreciation is the lesser of:
The fair market value of the property on the date you changed it to rental use, or

Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. For other increases and decreases to basis, see Adjusted Basis in chapter 2.

Sorry for the long winded answers

Links provided--
http://www.irs.gov/publications/p527/ch02.html
Chapter 4 below
http://www.irs.gov/publications/p527...link1000219151

I feel like a nerd for getting enjoyment out of the research

[Tinker Toy]

I obviously did not do a proper job of reading the pub.

It seems really unfair and biased in favor of the IRS that you can use the FMV as a basis for depreciation at rental time if it is less than the original price but not the FMV if the condo has appreciated. If it was mine, I would still call the IRS and ask them what is their rationale for the way they handle this situation as they describe it in their pub. I'd also ask what would satisfy them regarding my evidence of FMV in the case of an audit. Is there a time limit between the original purchase and the time when renting begins when the original purchase price is no longer valid for stated purposes? 1 week? One month? One year? These questions might further clarify what they say to reveal what could work.

Of course they can say: You follow our rules or we will come after you so it's important to keep the conversation civil and calm to get the nuances.

If you enjoy seeking out and interpreting the IRS income tax language, have a good time, nothing wrong with that. There is plenty of it to have fun with.