facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

Military Finances 301: Depreciating Your Rental

Taxes

During a career, a Senior Military Officer or NCO is fairly likely to end up with rental real estate. Rental real estate can be a good investment. It's a minefield when it comes to taxes and what really seems to mess people up is depreciation. Now if you've made it to the senior ranks, you're no dummy. That doesn't mean you can read a book and figure it out. It took me a while to realize that...it became obvious when I tried to put up crown molding. It might be the case for you when comes to depreciation.

If you do decide to rent your property, you need to establish the basis of the property (and you'll have to at least have the records if someone else is going to do the calculations for you). So, here is a checklist to do so.

  1. Find the closing statement and the appraisal from when you bought the house.
  2. Using the appraisal, determine the value of the land (unless you bought a condo). If the appraisal doesn't list a land value, look at your county assessments to determine a ratio between land and improvements and using the ratio to determine the value of the land.
  3. Subtract the value of the land from the total purchase price of the property to determine the price of the structure
  4. Now go to the closing statement (HUD-1) and look for expenses associated with the sale like title insurance and processing that you paid and add them to the price of the structure. Don't include pre-paid interest or escrow deposits. The result will be your original basis.
  5. While your living in the house, keep track of the cost of any improvements you made to the property. This could be things like a new deck or a kitchen remodel. Generally anything that adds to the value or life expectancy of the house is an improvement. Add these costs to your original basis to establish your adjusted basis.
  6. When you get ready to put the house up for rent, compare your adjusted basis  to the Fair Market Value (FMV) of the house (excluding land).
  7. Your depreciable basis is the lessor of your adjusted basis or the FMV of the house. This is the number you will enter into your software to determine your depreciation on the house.

Now if you're thinking this sounds like too much of a pain in the butt and you'll just skip it...don't. When you sell the house you owe taxes on the recapture of depreciation you took or should have taken.

What About After the House is Rented?

You'll need to account for any improvements you make and depreciate them as well. This could include things like decks and roofs or new appliances.They'll be entered as a new item and depreciated on their own schedule.

The Military and Your Money

Life on Active Duty or after you retire from the military can be pretty hectic. If you don't want to deal with this stuff, we suggest you find someone who specializes in and understands the financial nuances of your career and life.


If you liked this article, you might enjoy the following blog posts:

Retired Military Finances 201: Understanding Depreciation Recapture


Military Finances 101:  Becoming a Landlord


Military Landlord?  You Have Estate Planning Issues





Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.