A residence is converted to rental use. Before that, there was and improvement/renovation to the building.
Is there a tax law requiring to allocate the total improvement cost into land & building portions first, then take depreciation on building portion? Or I can depreciation on the the total improvement cost?
I'm having trouble figuring out how you would make capital improvements to the land. If you can, I suppose you'd have to allocate the cost.
But my guess is that any improvements would either be considered deductible repairs or capitalized (and depreciable) expenses.
You really should talk to an accountant or Enrolled Agent in person. You are clearly out of your depth on how to deal with your new business property.
If the improvement was only to the building, all of the cost is added to building's cost basis. If the improvement was all to the land (eg., clearing trees), the cost is added to the land basis and not depreciated. If improvements were made to both, you allocate the cost as appropriate. Building improvements are depreciated, land improvements are not.
Ira Smilovitz
not exactly correct. See Pub. 946.
Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. The cost of land generally includes the cost of clearing, grading, planting, and landscaping.
Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property.
Example.
You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. If you replace the building, you would have to destroy the bushes and trees right next to it. These bushes and trees are closely associated with the building, so they have a determinable useful life. Therefore, you can depreciate them. Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them.
Land
You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. The cost of land generally includes the cost of clearing, grading, planting, and landscaping.
Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property.
Example.
You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. If you replace the building, you would have to destroy the bushes and trees right next to it. These bushes and trees are closely associated with the building, so they have a determinable useful life. Therefore, you can depreciate them. Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them.
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