I bought a property for $110,000 that was not livable at the time of purchase. I spent $50,000 to renovate it and make it livable and rent it. Should I file $160,000 ($110,000+$50,000) as my cost for tax? Or should I divide the renovation cost from my original purchasing cost?
The amount that you purchased the property for needs to be broken into land and building if it wasn’t previously. The land is not depreciable, so it needs to be broken out from the original purchase price. Any additional costs would be added to the building basis, and when you started to rent the property out (not when you had a tenant) would be the date you placed the rental property in service. If this is residential rental property, then the rest of the building purchase would be depreciated over 27 ½ years.
In summary, your original $110,000 should be broken out between land and building. The building piece should be added to the $50,000 in renovations that were done.
For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.
Answered by: Shane R. Fisher, CPA, is vice president of finance at TriCorner Homes in Harrisburg, Pa.