tax question on setting rental property cost basis

[herm0016]

house was rented in march of 16. We lived in the house for about 2 years before that. I have to set the cost basis for the rental property and depreciation of the structure this tax season and want to get the highest possible value, so that when we sell and add the 500k exemption for living in it in the past x years we can increase our non-taxable basis on the next property.

Do i just call the city and see what the market value was in their eyes? Do I find some comps, set the price and save the comps with my taxes in case of questions down the line?

 

[Riverhound777]

I think the value should be on your property taxes. Separate item for land value and house value.

 

[SaltyNuts]

Why would the market value matter in the least as to your cost basis? I would think it is irrelevant - your costs basis is what you paid for it way back when, subject to adjustments for amounts you paid that are included in costs basis, and depreciation you took on the house while rented, for example.

 

[herm0016]

Why would the market value matter in the least as to your cost basis? I would think it is irrelevant - your costs basis is what you paid for it way back when, subject to adjustments for amounts you paid that are included in costs basis, and depreciation you took on the house while rented, for example.

we lived in it for about 2 years, the cost basis is what its worth at the time of transfer from primary residence to a business use, the value went up about 100k in that time.

 

[Xcobra]

Cost basis for renting it is the LOWER of the amount you paid or the fair market value of the house as of the date you turned it into a rental. You don't get a choice, mate.

 

[BoomerD]

https://www.irs.gov/publications/p527/ch02.html

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.

Cost Basis

The basis of property you buy is usually its cost. The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. Your cost also includes amounts you pay for:

• Sales tax charged on the purchase (but see Exception next),
  
  
• Freight charges to obtain the property, and
  
  
• Installation and testing charges.

Exception. If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. Such taxes were deductible before 1987 and after 2003.

Loans with low or no interest. If you buy property on any payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. See Unstated Interest and Original Issue Discount (OID) in Pub. 537, Installment Sales.

Real property. If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property.

Real estate taxes. If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller does not reimburse you, the taxes you pay are treated as part of your basis in the property. You cannot deduct them as taxes paid.

If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. Do not include that amount in your basis in the property.

Settlement fees and other costs. The following settlement fees and closing costs for buying the property are part of your basis in the property.

• Abstract fees.
  
  
• Charges for installing utility services.
  
  
• Legal fees.
• Recording fees.
  
  
• Surveys.
• Transfer taxes.
• Title insurance.
• Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

The following are settlement fees and closing costs you cannot include in your basis in the property.

1. Fire insurance premiums.
   
   
2. Rent or other charges relating to occupancy of the property before closing.
   
   
3. Charges connected with getting or refinancing a loan, such as:
   1. Points (discount points, loan origination fees),
      
      
   2. Mortgage insurance premiums,
      
      
   3. Loan assumption fees,
      
      
   4. Cost of a credit report, and
      
      
   5. Fees for an appraisal required by a lender.

Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance.

Assumption of a mortgage. If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage.

Example.

You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. Your basis is $300,000.

Separating cost of land and buildings. If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it.

If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes.

AND, perhaps more pertinent:

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,
  

If you don't know this stuff...maybe you should have a good CPA. (if they're any good, they should be able to save you more than you'll pay them in fees)