Question

Depreciation for new rental home

Forum|Forum|4 years ago
March 27, 2022
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In California, we've owned a home and lived in it since 1972. In tax year 2021 we converted the home to a full-time rental. Our original cost was approximately $75,000 including all closing costs. Current FMV is $3.5 million. We have done remodel improvements in 1988 totaling approximately $125,000. So I think my total basis for depreciation is $335,000 minus land value. Here is the hard question. In 2006, we had a total loss of home to fire. Insurance paid $570,000 to rebuild, we added another $140,000 to fix it the way we wanted (improvements) that they wouldn't pay for. How does this affect the rental basis. I think I add $140k to the $335k for a total of $475k for adjusted basis? And I should not include the insurance payments for calculating basis for depreciation on the home?

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ColeenD3

I'm lost as to how the $75,000 cost and $125,000 improvement add up to $335,000.

If you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition. However, you must adjust your basis by any amount of insurance reimbursement you receive or expect to receive for casualty losses. Pub 523

You must decrease the basis again for the amount of the depreciation.