How do you determine depreciation basis on a renovated rental?

Question

Bought a house that sat vacant for a while and renovated it over the course of a couple years. Never lived in it, and much of the renovation I did myself. The area has a couple houses that were renovated and sold, but most of the houses that sold are older and never renovated. My question is, do I just use the heavily reduced price I was able to purchase it for since it was vacant, and then the material cost of what I renovated plus what things I did contract out, even though that basis would be way under what the other renovated houses that sold near me per SF sold at, or are you able to use similar comps to determine the depreciation basis?

Bill B. · Answer

Not if insurance paid for it. Basis is what you paid for capex. I THINK you could probably just expense your deductible if insurance didn’t cover 100%. But ask your CPA/accountant because I don’t know.

Carini Rochester · Answer

You cannot use comps to determine basis. It's what you paid, minus the value of the land, plus what you spent on long term repairs (roof, furnace, etc. (Capital expenses.)) Repairs and maintenance could be expensed. Use IRS instructions to understand the definitions.

Aaron Zimmerman · Answer

I would first separate out the original purchase price between building and land. Then, I would add the costs of the improvements. The date you are able to take depreciation is when the property is ready for renting (i.e. advertising for rent or obtaining a certificate of occupancy). Unfortunately, you can't look at other properties for comps.

On the positive side, it seems like you have a good potential BRRRR that you can use to purchase additional properties.

Ashish Acharya · Answer

@Nate Pucel The depreciation basis for a rental property includes the purchase price plus the cost of renovations and improvements that add value or extend the property's life. You must exclude the land value, typically allocated based on property tax assessments or an appraisal, as land is non-depreciable. Depreciation begins when the property is placed in service (available for rent). Comparable property sales do not affect the depreciation basis, which is determined by actual purchase and improvement costs. Accurate records of all expenditures are essential to claim deductions and calculate the cost basis for future capital gains taxes, including depreciation recapture.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Nate Pucel · Answer

@Carini Rochester

Thanks for the reply. Do you know if a roof that was replaced due to an insurance payout can be added to the basis?

How do you determine depreciation basis on a renovated rental?

How do you determine depreciation basis on a renovated rental?

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