Q. In your column of August 14, 1976, you said " . . . depreciation may be taken on the value of the entire depreciable amount of the real estate investment, not just the amount that the investor has actually invested." Are you saying that real estate purchased 20 years ago for $800, and now valued at $35,000 and used as rental property, can be depreciated based upon the value of $35,000?
A. No. I take it that you've recently converted an owner-occupied (or at least, non-rental) house to a rental house. In that case, your basis for depreciation is the lesser of (1) fair market value of the house and other depreciable improvements at the time of conversion or (2) your adjusted cost basis of the house and other depreciable improvements.
How do you determine which is less? Well, for fair market value, the best way, I think, is to have your property appraised by a qualified appraiser. And be sure to have the appraiser value the land (which isn't depreciable) and the house and other depreciable improvements (which are depreciable) separately. Your basis for depreciation is determined by the fair market value of your house and other depreciable improvements.
In your case, stated simply, you get your adjusted cost basis by adding your original purchase price or construction cost (again, of the house and other depreciable improvements only) to (1) the cost of any permanent improvements, (2) certain closing costs, if any, you paid (e.g., real estate commissions and legal and recording fees . . . again, apportioned to the house and other depreciable improvements only), (3) other charges you properly elect to capitalize, and (4) all other proper capital expenses items. From this, you subtract (1) unreimbursed casualty and theft losses if any, and (2) amounts received for easements, if any, apportioned to the house and other depreciable improvements.
Earl A. Snyder answers questions from readers only inthis column. His address: 14909 Kalmia Dr., Laurel, Md. 20810.