I'm in the process of purchasing with cash my first rental property and am planning to use the Brrrr method. Some of the dots I am trying to connect for my analysis are how the refinance step impacts the depreciation of the property and if there is any strategy to the timing of that as we approach the end of year.
I understand that my depreciation is calculated against the improved value of the property. Once the refi process is finalized should I expect there to be parity between the improved value figure that the lender assigns and the improved value figure that my county auditor assigns? ..and if not which figure is used for the depreciation formula come tax time?
Assuming I decided not to use leverage on the equity of the property and continued to operate the rental and rehab with all cash - Is there a method to get the improved value of the property reappraised post rehab to enhance the depreciation opportunity?
Is there benefit to sneaking in an appraisal before the end of the calendar year? i.e. can the improved value of the property based on a reappraisal that occurred on 12/31 be used for depreciation purposes over the entire calendar year?
Howdy @David Roberts
I am not a CPA or claim to be an expert. This is just my opinion or understanding and is not intended to be accounting advice.
Answer # 1
Your depreciation is based on the initial costs basis when you purchased the property. Any additional improvements through renovations or major repairs are depreciated based on the individual component/project costs. These will be added to your initial cost basis depreciation as they occur. I do not believe financing has any bearing on depreciation. However, your tax assessment will probably change. Increasing the amount the property is taxed. Depreciation along with operating costs are used to reduce your rental income for tax purposes.
Answer # 2 & 3
You can request an appraisal anytime you want. However, it has no relation to depreciation (See answer #1).
You should be more concerned on trying to recover more Rehab costs during the year they occur rather than depreciating them. The sooner you place the property in service the better chance of claiming them as operating expenses verses having to use depreciation schedule (27.5 years) to get it back. @Brandon Hall recently posted a something related to this. Strongly recommend you read it and contact your CPA. https://www.biggerpockets.com/renewsblog/forget-br...
Hope this helps.
This helps tremendously @John Leavelle - Thanks!!
@David Roberts - More than anything I suspect your deal. Please make sure your base is covered.