Determining initial Cost Basis on Rental.

[AZ-Tax]

From what I read, The rules on cost basis is: purchase price plus any repairs and improvements owner did on the property prior to converting into a rental OR current market value at time rental was place in service regardless if it was rented immediately or not. The LOWER of the 2 is the cost basis.

[TaxGuyBill]

The lower of the 2 is the DEPRECIABLE basis, and the basis for calculating a loss. The actual adjusted cost basis is used for calculating a gain.

[AccTaxMan]

The lower of the 2 is the DEPRECIABLE basis, and the basis for calculating a loss. The actual adjusted cost basis is used for calculating a gain.

Do you mean if the property is sold at a loss, the cost basis is the lower of the adjusted cost basis and the FMV?

Sale price would usually be equal to the FMV. So it would be impossible to have a loss under any circumstances. Therefore, in any sales, it would either be a gain or just breaking even. Am I missing something?

[TaxGuyBill]

Do you mean if the property is sold at a loss, the cost basis is the lower of the adjusted cost basis and the FMV?

Sale price would usually be equal to the FMV. So it would be impossible to have a loss under any circumstances. Therefore, in any sales, it would either be a gain or just breaking even. Am I missing something?

For a loss, the basis for calculating the loss it the lower of cost or FMV at the time it was converted to a rental.

If the sale price is between that number and the actual adjusted cost basis, there is neither a gain or loss.


For example, let's say the house was purchased for $200,000, and FMV at time of rental conversion was $100,000. For simplicity, let's ignore depreciation, improvements and selling costs.

If the house was sold for $80,000, it would be a $20,000 loss.
If the house was sold for $220,000, it would be a $20,000 gain.
If the house was sold for $100,000-$200,000, there is neither a gain or loss.

http://www.irs.gov/publications/p551/ar02.html#en_US_2010_publink1000257025

http://www.marketwatch.com/story/tax-angles-when-converting-your-home-into-a-rental-2013-05-14

[AccTaxMan]

For a loss, the basis for calculating the loss it the lower of cost or FMV at the time it was converted to a rental.

If the sale price is between that number and the actual adjusted cost basis, there is neither a gain or loss.


For example, let's say the house was purchased for $200,000, and FMV at time of rental conversion was $100,000. For simplicity, let's ignore depreciation, improvements and selling costs.

If the house was sold for $80,000, it would be a $20,000 loss.
If the house was sold for $220,000, it would be a $20,000 gain.
If the house was sold for $100,000-$200,000, there is neither a gain or loss.

http://www.irs.gov/publications/p551/ar02.html#en_US_2010_publink1000257025

http://www.marketwatch.com/story/tax...tal-2013-05-14

Thank you very much.

What about if we have a scenario like this:

Taxpayer bought a property for rental in 2000 at $300,000.

In 2003, he converted it to his home and lived there for 1.5 year.

Then in 2005, he moved out and used it for rental again. The FMV of the property at that time was $250,000.

So in case he had a loss, does he use $300,000 or $250,000 as his cost basis?

[TaxGuyBill]

Thank you very much.

What about if we have a scenario like this:

Taxpayer bought a property for rental in 2000 at $300,000.

In 2003, he converted it to his home and lived there for 1.5 year.

Then in 2005, he moved out and used it for rental again. The FMV of the property at that time was $250,000.

So in case he had a loss, does he use $300,000 or $250,000 as his cost basis?

I looked for guidance for this type of thing in the past, and haven't been able to find anything. This is what I would do:


Start off with $300,000. That is the first rental FMV/Cost. Then subtract any loss while it was a personal residence.


For example, let's say purchase price was $300,000 for the rental, and FMV when it became a personal residence was $270,000. When he moved out, the FMV was $250,000. So the 'loss' while it was a personal property would be $20,000 ($270,000 minus $250,000).

So let's say he sells it for $225,000. Of the $75,000 loss ($300,000 minus $225,000), $20,000 of that is non-deductible personal loss. For for entering the sale, I would enter $280,000 as the cost basis/purchase price.


I don't know if that is technically correct, but that legitimately allocates the loss of the property while it was a rental, but keep the non-deductibility of the personal portion.

Does that make sense?

Does anybody agree or disagree?

[AccTaxMan]

I looked for guidance for this type of thing in the past, and haven't been able to find anything. This is what I would do:


Start off with $300,000. That is the first rental FMV/Cost. Then subtract any loss while it was a personal residence.


For example, let's say purchase price was $300,000 for the rental, and FMV when it became a personal residence was $270,000. When he moved out, the FMV was $250,000. So the 'loss' while it was a personal property would be $20,000 ($270,000 minus $250,000).

So let's say he sells it for $225,000. Of the $75,000 loss ($300,000 minus $225,000), $20,000 of that is non-deductible personal loss. For for entering the sale, I would enter $280,000 as the cost basis/purchase price.


I don't know if that is technically correct, but that legitimately allocates the loss of the property while it was a rental, but keep the non-deductibility of the personal portion.

Does that make sense?

Does anybody agree or disagree?

It makes sense to me. I'd also like to hear more about the opinion of our fellow tax professionals on this board.

By the way, the FMV when the property was converted to his home and also the FMV when the property was converted back to rental has to be determined. How do we go back so many years to made the determination though? Is it required to hire a professional appraisal service or can the taxpayer depend on internet information such as the estimated market value of the property on zillow.com.

[Lion]

He had the FMV at conversion to depreciate at lower of FMV or adjusted cost basis, didn't he? How about tax bills from the relevant years? In my area that's only 80% of FMV per the assessment firm hired by the tax assessors office, but an easy computation to get to 100%.

[AccTaxMan]

He had the FMV at conversion to depreciate at lower of FMV or adjusted cost basis, didn't he? How about tax bills from the relevant years? In my area that's only 80% of FMV per the assessment firm hired by the tax assessors office, but an easy computation to get to 100%.

The value on property tax bill almost never reflects the current market value of the property in my area. I think they just increase the based value by 2% every year, no matter how the market performs.

If a determination is to be made, does the IRS accept estimated value from the popular real estate websites?

[TaxGuyBill]

I think it depends on how picky the auditor is. If it is large amounts of money, an appraisal is best.


I agree with Lion, if you can use property tax records to record trends (then adjust for true value), that is ideal.

If Zillow (or whatever else) matches the actual purchase price and sales price, I would think the FMV assessments in between there should be accepted. If not, it probably depends on the IRS auditor.

[Gary2]

Aside: I think you're misusing the phrase "cost basis." If you look at Pub. 551, it always uses the phrase to describe a basis derived from cost. That's why Bill, way back in the first reply, used the term "depreciable basis".

To put it another way, cost basis is one of the possible ways of calculating a basis that you might use. But in any particular situation, you have to ask which basis to use -- it might be the cost basis, it might be some other basis. For a conversion from personal to rental, as Bill said, you'd use the adjusted cost basis to calculate a gain, but you might be using a different basis for depreciation or to calculate a loss.