Basis of Vacation Home/Rental Property

I have purchased a vacation home in Delaware and I live in Maryland. I will use it more than 14 days and will rent it out more than 14 days. Two questions:

1) Can I breakout the asset purchase between the building itself and the furniture and fixtures and then depreciate each piece of furniture at a different rate than the building? What would be the useful life of USED furniture? I figured this would allow me to depreciate some of the costs faster than using a 27.5 life. Is this worth the trouble? I have about $75k in furniture.

2) Do I need to file a tax return in Delaware even if I will have a loss every year?

Thanks.

Reply to
Maria M.
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First allocate cost between building and land, and then between structure and furniture and appliances.

And justify this allocation. Even if it's used furniture the basis for depreciation is lower of cost or FMV on date placed into rental service.

Typically use 7 year depreciation period, HY 200DB for the furniture.

Although if the furniture qualifies for MQ, that's what you go with.

If you have any questions about this, I strongly recommend you seek local professional tax assistance at least the year you place the property into rental service and the year you dispose of it.

I do not get much involved in Delaware taxes, but most states will want you to report rental activities even if at a loss.

Reply to
Arthur Kamlet

Most states will also disallow loss carryforwards for returns not filed and on the ultimate disposition this will generally result in a very large gain. Basis is still the federal basis (generally) and you can not use the loss carryforwards to offset it.

Regards,

Mark Rigotti

Reply to
Mark Rigotti

Yes, mixed-use rentals are another layer of complexity on top of regular rental items.

As a general rule, your rental gross income (rents received) will exceed most state's filing requirement threshold and require a return.

-Mark Bole

Reply to
Mark Bole

it's not often I agree with my esteemed colleague way up nawth in O HIGH O. But here goes.

  1. First I would determine fmv of furniture and applicances, total those and take that out of total price. Only then would I allocated between building and land based on latest figures from local tax assessor.

This is the same method we use when property is sold on down the line where personal property is not yet depreciated. Simply subtrace the book value of property from total sale price and then allocate remaining sale price between land and building, but based on the then ratios taken from local tax assessment.

  1. As for depreciation on furniure and applicances, I believe we can now use 5 years instead of the former 7 years. When was this change? Was it about 5 years ago? Time flies when you're having fun. And even when the Cubs have lost and find themselves in chapter 11!

ChEAr$, Harlan Lunsford, EA n LA

Reply to
HLunsford

"...you cannot use the loss carryforwards to offset it"????

A sale which is a total disposition of an interest in a passive activity means that any suspended loss IS deductible and can offset the gain on sale.

If your context was solely that of required, non-filed returns and therefore presumed no accumulated passive loss (for state income tax purposes), OK, but then I don't like how you said it.

Reply to
D. Stussy

What if the gain on the sale of the property minus the accumulated/ disallowed depreciation is a negative number? Is the loss you can claim on Schedule 1040 zero, and the remainder is carried over until you begin a new activity like this one? Or can you actually take the negative loss?

For example, buy a house at 100k. Depreciate 50k of it, and have accumulated depreciation of 50k. Sell house for 90k.

Gain = -10k Depreciation to recapture = 50k Therefore Gain = +40k Disallowed depreciation = 50k Net gain = -10k

Do you get to claim the full 10k loss, or is the loss zero and the 10k gets carried over until you get a new rental?

Reply to
removeps-groups

# 5-year property. This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc.), automobiles, and light trucks. ?This class also includes appliances, carpeting, furniture, etc., used in a residential rental real estate activity. ?Depreciation on automobiles, certain computers, and cellular telephones is limited. See chapter 5 of Publication 946.

# 7-year property. This class includes office furniture and equipment (desks, file cabinets, etc.). This class also includes any property that does not have a class life and that has not been designated by law as being in any other class.

Flat screen TV's, which might very well be in the furnished apartment here, would be 5 year property.

Reply to
removeps-groups

You get the entire suspended loss. See the Passive Activity rules.

Reply to
D. Stussy

Thanks for the cite! I remembered the carpeting, not the furniture.

And once again, Harlan is the man!

Reply to
Arthur Kamlet

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