I am trying to figure out what the depreciation basis will be for the property that I will be closing in two weeks.
I am buying a property with full cash, doing some minor exterior rehabs (place is already rented out to a tenant) and then going to do a cash out refinance within 1-2 month. I found a bank that would do a cash out refi with no seasoning + on ARV.
My question is:
Purchase price: $31,500
Expected Rehab: $3,000
Expected ARV appraised by the bank: $42,000
Land value on tax assessor's website: $11,500
Is my depreciation basis 31,500 - 11,500 = 20,000? or is it 42,000 - 11,500 = 30,500?
Thanks in advance!
Your depreciable basis is what you paid for it 31,500 (less any value allocated to the land), the other information you have provided has no relevance. Now with regard to your rehab costs, you will need to determine whether those costs get capitalized or expensed based upon the nature of those expenditures.
Andrew, Congrats on the property you will be closing soon.
Usually, the basis of the property is the cost plus certain adjustment you make to the property. In your case, judging from the amount looks like you can deduct the cost of the rehab as expenses using de minims safe harbor rather than capitalizing and depreciating it.
The safe harbor applies to amounts paid during the tax year to acquire or produce what the Regs call a “unit of property” (UOP), you must meet these requirements:
- (1) at the beginning of the tax year, the taxpayer has written accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount (which will be 2500 for you), or with an economic useful life of 12 months or less;.
- (2) The taxpayer treats the amount paid for the property as an expense on its books and records in accordance with its accounting procedures. ( do this on your bookkeeping software or whatever you utilize)
- (3) The amount paid for the UOP doesn't exceed $2,500. as substantiated by invoice ( hopefully the cost of the individual rehab cost is less than 2500 for you)
Note: The cost for the Unit of Property includes l additional costs (for example, delivery fees, installation services, or similar costs) if these additional costs are included on the same invoice with the tangible property.
My answer to yoru question is probably none of the above. You don't give us all the information needed to answer your question. You told us what the tasx axxessor's estimate of land value was but you did not tell us the assessed value of the property. These two numbers are used to determine the depreciation basis for the dwelling structure.
Let's just say that the tax assessor's property valuation is $46000, of which $11500 is allocated to the value of the land. Using these numberrs, 75% of the assessor's tax value of the property is allocated to the dwelling structure and 25% to the land. Now, to determine your depreciation basis, multiply your purchase price by 75%. to get $23,625 as the depreciation basis for the dwelling structure. You would add to this number the cost of your capital improvements.
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