Primary house converted to rental, tax ?? on improvements

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squirm
Posts: 4239
Joined: Sat Mar 19, 2011 11:53 am

Primary house converted to rental, tax ?? on improvements

Post by squirm »

After buying a new house we converted the one we lived in, into a rental last year. We lived there for 10 years and made various improvements, most of the improvements I did myself, such as putting in solid real hardwood floors that took me almost a year, retaining walls, new interior trim, etc etc etc....These improvements were done over time, some within a few years after buying the house, others a year before we converted the house to a rental. I never keep receipts if that matters being at the time we had no intentions on keeping the house. However I could probably pull up old credit card statements, if needed.

When doing taxes, how do I account for this? Are the improvements added to the costs basis? Or broken out separately? How about my time? Is that accounted for?
cherijoh
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Joined: Tue Feb 20, 2007 3:49 pm
Location: Charlotte NC

Re: Primary house converted to rental, tax ?? on improvement

Post by cherijoh »

It is my understanding that anything that adds to the value of the house that is NOT considered maintenance should add to the cost basis of the house. So replacing a carpet would be maintenance, but installing hardwood floors would add to the basis. FYI - those types of upgrades would be considered as adding basis whether or not you turned it into a rental, so you should have kept better records. Similar things would be adding granite countertops in the kitchen, adding central air conditioning, adding an addition to the house, etc. When you convert to a rental property, you establish the cost basis for depreciation purposes.

I don't think you can charge anything against your own labor, but if you had a professional installer that would be wrapped into the cost of the upgrade.

As far as rentals go, maintenance can be deducted as an expense, but you can only capture improvements through depreciation or the higher cost basis when you eventually sell. Any depreciation you took while it is a rental is recaptured when you sell.

Disclaimer: I am not a tax expert and am basing this answer on having converted a condo to a rental about 20 years ago, so rules could have changed.
Topic Author
squirm
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Joined: Sat Mar 19, 2011 11:53 am

Re: Primary house converted to rental, tax ?? on improvement

Post by squirm »

Thank you.
There are two ways to determine the cost basis, one is from the initial purchase + improvements, the other is with market value. Tax Cut says to use the lesser of the two. But both are difficult to determine, any advice on this? Also the improvements are done over time, how would this be determined ? Would it be prorated?
Lafder
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Location: East of the Rio Grande

Re: Primary house converted to rental, tax ?? on improvement

Post by Lafder »

I recommend the NOLO Every Landlord's Tax Deduction Guide for much more detail.

You may lose the capital gains tax exclusion if you have not lived in the house 2 of the past 5 years, so keep that in mind over the first few years you are renting the house in case it makes more sense to sell it sooner.

The timing of improvements on a primary residence do not matter, the actual amount spent on labor and supplies does add to your purchase price as your cost basis. So no, you can not count your own "sweat equity." (However sweat equity does raise the value of your house, hopefully, so you get it back if you sell the house or as you rent it by being able to get higher rent)

Cost basis = purchase price plus improvements. Yes you need receipts. But you can take a chance of counting something and being audited and asked to provide the receipt. In my case I know I saved them, but I would have to go through all 12 years of saved papers to find all actual receipts for everything.

For a rental, improvements and their dates matter since they are depreciated over years. Maintenance and repairs count against that year's income, so there is a more immediate benefit in offsetting income. (versus no tax break for maintenance/repairs on a primary residence).

As far as calculating fair market value, you can ask a realtor, and also try looking at Trulia and Zillow for your own house as well as nearby comparables.

I plan to make a detailed list of the basis for my cost basis or fair market value and save it with my papers this year so I have something to show for how I came up with the number if audited.

lafder
Lafder
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Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: Primary house converted to rental, tax ?? on improvement

Post by Lafder »

See page 15 of this IRS document.
http://www.irs.gov/pub/irs-pdf/p527.pdf
lafder
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