BiggerPockets

If you bought an REO property (to be used as a rental) that needed substantial repairs and the market value is higher than what you paid for it, how do you determine the basis for federal taxes?

I have been told variously that you must use the sale price, or that you can use the sales price + the repair costs you put into it, or that you can use a comp which represents the real market value (after repairs). I'm wondering what other people here do and what the proper way to handle this is. Thanks.

My non-professional understanding of basis:

Your basis is the purchase price, including acquisition costs (except any that may be deductible as expenses in the current year) plus the amount you spend on the property to put it into rent ready condition. Also, capital expenditures made after the property is put into service increase your basis.

Any items that you can deduct in the current year as expenses do not increase your basis. Depreciation reduces your basis (even if you don't claim it on your taxes).

I did visit a CPA but I misplaced my notes from that meeting (that's why I was posting here). However I just now located the notes.

He said to use the purchase price + the repair costs as the basis. (I understand the part about the land--I did that last year on my return--thanks).

Thanks Justin.

From their publication, it sounds like you can only add capital improvements to the basis, not things like replacing broken doorknobs, AC handlers, or redoing the floor, etc.

I haven't really had to do any capital improvements so far. Perhaps its best to just use the purchase price as the basis and claim the other items as repairs, (except in the case of items that must be depreciated).

Thanks Steven. I think I already learned that last year, but completely forgot about it. I need to start keeping better notes about what I've learned.

I second what J Scott said If your tax guy(yourself) doesn't know that, than you should fire your accountant and hire someone else.

*not an insult just it should help you financially considering there is probably a lot you don't know.

-Steven the Tax Guy

Thanks David. I did go to a CPA several weeks ago for advice on various issues and he advised me to do this myself on Turbotax, because my situation isn't that complicated.

Bienes,

Than you DEFINITELY need a new accountant. He should be advising you and working with you regularly to help plan and save.

-Steven the Tax Guy

Bienes,

It is also the fact that he should be coaching you on what to keep track of and organization of records. And most importantly he should be teaching you how to keep track of new items for depreciation.

-Steven the Tax Guy

You may have gotten good advice. You don't tell us what you asked. I am guessing that you asked about tax return stuff, after the fact. After the fact is too late to be consulting a CPA about what you should do. All the CPA can do for you "after the fact" is help you with your (uncomplicated) tax return.

Since you weren't asking anything about tax planning for next year, I agree with the CPA that your questions would probably all be answered by TurboTax for the cost of the software and a lot cheaper than the hourly rate you would have paid him/her.