Rental Property Cost Basis

[jofijohnjoseph]

Hello,

A client bought a property in 2007 for $300,000 and converted it to rental use in 2011.  At that latter date, the home value had declined to $250,000.  Accordingly, per IRS rules, the cost basis for the home was set at $250,000 and this value (less land cost) was depreciated.

Fast forward to 2022 -- the property was sold.  How can I adjust ProSeries to reflect the $300,000 value as the actual cost basis for sale purposes, instead of the lower $250,000 entered onto the Asset Worksheet?

Thanks in advance.  

[IRonMaN · Accepted solution]

I would just go into the asset entry worksheet and increase the cost to the higher amount.  I would also increase land by the same amount as the cost increase so the software doesn’t mess around with adjusting depreciation.

[jofijohnjoseph]

That did the trick -- thank you!

[IRonMaN]

You betcha!

[BobKamman]

The software always asks me if I want to report the land and improvements separately, as if I would be foolish not to make that extra effort.  I'm sure your solution would throw a monkey wrench in the works, but then in England, they call them spanners.  Not to be confused with Spaniards, who seem to be having a problem with football, which we call soccer.  Now, where was I?  Sorry, I was just feeling light-headed.  

[IRonMaN]

You got a little long winded Mitch.  You can sit down and relax now.

[TaxGuyBill]

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@jofijohnjoseph wrote:

Accordingly, per IRS rules, the cost basis for the home was set at $250,000 and this value (less land cost) was depreciated.

How can I adjust ProSeries to reflect the $300,000 value as the actual cost basis for sale purposes, instead of the lower $250,000 entered onto the Asset Worksheet?

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No, the depreciable Basis is $250,000.  The "cost" Basis is still $300,000.

Keep the depreciable Basis as it originally was ($250,000).  Then in the Disposition section of the Asset Entry Worksheet, about 1/2 into that section there is a line that says "Asset gain (loss) basis, if different (enter 100% of basis)".  Enter $300,000 on that line.

[IRonMaN]

Six of one, half dozen of the other - what will that change on the 4797? 😁

[TaxGuyBill]

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@IRonMaN wrote:

Six of one, half dozen of the other - what will that change on the 4797? 😁

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The Instructions for 4797 indicate that the land is supposed to be reported separately (which usually doesn't make any difference, but in certain circumstance it can affect things).  If you report the land separately and change the Basis of the land (to make depreciation correct), it will make the land sale funky.

Plus, if there is already a spot on the worksheet for it, why do a work-around?

Plus, I prefer a half a dozen, rather than six.  😂

[IRonMaN]

But if you are going to go completely by the rules and report land separately, you would need the purchase agreement to break out the cost of the land separately ---------------- something I have never seen.  If it isn't broken out separately, you are doing your own work around to fix the purchase agreement.  I prefer "six".  I have never broken out land on a 4797 and to this day I have never had an armed IRS agent come storming into my office demanding it be broken out.  What's the old saying????? Oh that's right - CAGMC 😬

[TaxGuyBill]

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@IRonMaN wrote:

I prefer "six".

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It is too bad that we are "at odds" about such an important thing.  🤣

[IRonMaN]

I think we are “evens” or did someone change the rules and 6 and 12 are now odd numbers?🤔

[TaxGuyBill]

😂

[BobKamman]

The way I see it, you guys are at 6s and 7s over this issue.

[qbteachmt]

"you would need the purchase agreement to break out the cost of the land separately"

Our tax assessment listings already do this, and I use their values for relative back-calculation. If the land was 20% "back then," I figure it's still 20% for a step up scenario, even if the assessed values are now 350% higher than purchase date.

[BobKamman]

That might work where raising sheep is a big moneymaker, but around here people buy houses that were built 80 years ago just to tear them down and put up a big, modern McMansion.  The land has gone from 20% of the value, to 100% of the value.  

[MICHAELMARS]

add a non-depreciable asset.  same as what you do with 1031's