Determining basis of REO property (rental)

[Bienes Raices]

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.

[Jon Holdman]

Market price and comps are irrelevant. Your basis is what you paid, plus some purchase closing costs plus what you put into the house before its ready to rent. Then the basis goes down over time as you take depreciation. Of course its more complex than this, so you and your CPA will need to sort out the details item by item.