Converting Main Home to Rental: Depreciation

There is a special rule that one must use when computing depreciation on converting your home to a rental. You must use the lower of FMV or adjusted cost basis on the conversion date. I have not found any reference to having to use this special rule for the contents if you rent the home furnished. Am I correct that the contents (appliances, carpeting, furniture, office F&F, etc.) use the cost basis and not the "lower of rule"?

Upon selling the property one uses a special rule for computing gain or loss when the FMV is less than cost basis on the conversion date. Gains are computed using the normal cost basis and losses are computed using the lower FMV. Depending upon the sales price, you could find that you have neither a gain or loss. Regardless of the facts, the IRS will use allowed or allowable depreciation upon the sale. This means that even if you never took depreciation, the IRS calculation for gain/loss will assume you did. Is this assumption also true for the contents if you rent the home furnished? I.e., the IRS will assume you depreciated the contents or is there some election you can use to not depreciate the contents and avoid the allowed or allowable rule for the furnishings?

Lastly, am I also correct that if you rent the home with artwork, there is no depreciation allowed for the artwork, as artwork has no determinable life?

Reply to
Alan
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No. ALL assets converted into "business" use after personal use follow the lower of adjusted basis or FMV.

Again, wrong. The "basis consumed" during the personal use period is a factor - for if it produces a loss, the loss is not recognized.

All assets not otherwise stated to be in a different class default to a 7 year life for depreciation purposes.

Reply to
D. Stussy

  1. You didn't answer my question re: allowed and allowable. I'll assume the rule holds for the furnishings.
  2. I've doubled checked the rules and losses are allowed because you used the lower of FMV for determining the loss. The difference between your adjusted cost basis and the FMV has already been consumed.

Yes as long as there is a determinable life. A determinable life is one of the prerequisites for depreciation. Therefore, artwork, as I understand it, not having a determinable life does not default to 7 years.

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Reply to
Alan

Personal losses are not deductible (IRC Section 262), but it still has to be accounted for in the event that the personal part yields a [capital] gain.

Nothing lasts forever.

Reply to
D. Stussy

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Revenue Ruling 68-232 (1968-1 C.B. 79) states that a valuable and treasured art piece does not have a determinable useful life. The ruling also distinguishes between the condition of the artwork and its life. While the actual physical condition of the artwork may influence the market value placed on it, its condition will not ordinarily limit or determine the artifact's useful life. Accordingly, works of art may not be depreciated. While a precise definition of "works of art" does not exist in the code, such assets usually fall into a category of assets that have no determinable useful life and do not predictably decline in value.

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Anyone know how to find the text of this revenue ruling? It seems so old maybe they didn't put it on the internet.

Reply to
removeps-groups

The last court case I can find that cites it, LIDDLE v. C.I.R.S., 65 F.3d 329 (3rd Cir. 1995), indicates that with respect to collectibles it may have been superseded by §168. ___ Stu

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Reply to
Stuart Bronstein

The Liddle decision was predicated on the fact that the violin was not "artwork." It was "a tool of his trade and not a work of art. Normal wear and tear from Liddle's professional demands took a toll upon the instrument's tonal quality and he, therefore, had every right to avail himself of the depreciation provisions of the Internal Revenue Code as provided by Congress."

I'm not aware of any decision subsequent to the 1968 ruling that allows for the depreciation of artwork that is not subject to wear and tear and has no determinable life. I did find references in RIA and CCH that differentiated between for lack of a better term.. commodity like art that a business such as restaurant would buy to hang on the wall. These are typically inexpensive prints that do not appreciate in value and are subject to wear and tear. They could be lumped in with the other F&F of the restaurant.

Reply to
Alan

You are completely off base. The reason for the special rule is to account for any personal loss. You use normal cost to calculate a gain and you use the lower FMV to calculate a loss. The loss is a rental loss and subject to rental loss rules not personal use loss rules. As you have used the lower FMV you have already accounted for any personal loss (the difference between the normal basis and the FMV on the conversion date).

Reply to
Alan

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