Determining FMV for Rental

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bnmn
Posts: 15
Joined: Tue Aug 09, 2011 3:21 pm

Determining FMV for Rental

Post by bnmn » Tue Jan 08, 2013 4:47 pm

We are intending to convert our current residence (SFH) into a rental property later this year and are trying to quantify all of the relevant financial implications. I am having trouble finding information on how to determine the Fair Market Value (FMV) of the property for tax purposes. I know the FMV will definitely be lower than the adjusted basis of the property, I just don't know how to determine and justify it (other than hiring a professional appraiser). How is this value determined? If I have some leeway in setting the cost basis, it seems like I would want it to be as high as possible to maximize depreciation write offs and minimize capital gains when I eventually sell the property. Does this sound right?

Purchased 11/2007 for $235k
Appraised 09/2011 for $170k

rogermexico
Posts: 161
Joined: Tue Jan 08, 2008 5:58 pm

Re: Determining FMV for Rental

Post by rogermexico » Tue Jan 08, 2013 6:01 pm

Cost basis is the amount you paid (including settlement and closing costs, etc.). See IRS Pub 527 page 10. You do have to split this value between the land (non-depreciable) and the buildings/improvements
I'd recommend Every landlords' deduction Guide/ Fishman for further info.

jebmke
Posts: 8281
Joined: Thu Apr 05, 2007 2:44 pm

Re: Determining FMV for Rental

Post by jebmke » Tue Jan 08, 2013 6:02 pm

rogermexico wrote:Cost basis is the amount you paid (including settlement and closing costs, etc.). See IRS Pub 527 page 10. You do have to split this value between the land (non-depreciable) and the buildings/improvements
I'd recommend Every landlords' deduction Guide/ Fishman for further info.
I believe for a conversion you have to value the tax basis at the FMV when you convert. The original purchase price may be higher or lower than that.
When you discover that you are riding a dead horse, the best strategy is to dismount.

bnmn
Posts: 15
Joined: Tue Aug 09, 2011 3:21 pm

Re: Determining FMV for Rental

Post by bnmn » Fri Jan 11, 2013 12:30 pm

jebmke wrote: I believe for a conversion you have to value the tax basis at the FMV when you convert. The original purchase price may be higher or lower than that.
The property has decreased in value since it was purchased, so my basis will be the FMV. How do I determine the FMV??

MGBGTV8
Posts: 145
Joined: Fri Jan 11, 2013 12:40 pm

Re: Determining FMV for Rental

Post by MGBGTV8 » Fri Jan 11, 2013 12:47 pm

Are tax assessments in your area a reasonable guide? Some places they are, some they aren't.

porcupine
Posts: 1267
Joined: Thu Nov 04, 2010 11:05 am

Re: Determining FMV for Rental

Post by porcupine » Fri Jan 11, 2013 3:35 pm

jebmke wrote:
rogermexico wrote:Cost basis is the amount you paid (including settlement and closing costs, etc.). See IRS Pub 527 page 10. You do have to split this value between the land (non-depreciable) and the buildings/improvements
I'd recommend Every landlords' tax deduction Guide/ Fishman for further info.(italicized portion mine)
I believe for a conversion you have to value the tax basis at the FMV when you convert. The original purchase price may be higher or lower than that.
I recommend the same book that rogermexico does, though you (jebmke) are right as well. The basis of a rental (originally purchased as a primary residence) is the lower of cost price and the current price.

bnmn:

A good starting point is to look at comparables; you might want to befriend a realtor (don't have to) and request him/her to provide you with a market analysis, and go from there.

- Porcupine

billern
Posts: 1074
Joined: Fri Dec 07, 2007 4:08 pm

Re: Determining FMV for Rental

Post by billern » Fri Jan 11, 2013 3:39 pm

bnmn wrote:
jebmke wrote: I believe for a conversion you have to value the tax basis at the FMV when you convert. The original purchase price may be higher or lower than that.
The property has decreased in value since it was purchased, so my basis will be the FMV. How do I determine the FMV??
It is not particularly accurate but zillow.com provides a very rough estimate. If you want something you can rely on, an appraisal from a qualified appraiser would be the way to go. I live in a fairly high cost of living place and have seen appraisals for $300-400.

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