Figuring Basis
How do I figure the basis of a house I've lived in for 3 years? I'm planning to move and turn it into rental property. I also plan to do the same thing with the property I'm buying in about 2 years.
Anyway, I paid $65K on house A in 2000, haven't made any capital improvements - just routine maintenance and painting. I plan to hold it in my name for the time being. Market value is about $72K at this time. Also, I need to make several repairs. Should I wait until I have moved out and listed the house "for rent" so that I can deduct the repairs immediately against rents? Or, can I make the repairs now and still consider them as rental maintenance expenses?
Your cost basis is what you pay for the property plus the cost of your capital improvements. It does not matter how long you have lived there, nor what the current FMV is today. In your example, your cost basis is $65K.
If you want to calculate your depreciation basis, you have to subtract the value of the land the property sits on. Land can not be depreciated.
If you paid $65K for the property, and if your tax assessor allocates 20% of your property's assessment to the land and the other 80% to the building, then the basis for your land is about $13K and the basis for your building depreciation is $52K in this example.
Technically, you can not deduct repairs and maintenance as an expense until the property has been placed in service. At a minimum, you must move out and advertise the property for rent to have the property considered to be "placed in service".
DaveT:
Can I/should I increase my basis by forming an S-Corp holding company and selling my house to it for $72,000? The gain would be tax free to me since I've lived there for 3 years, right?
Also, if I do this can I rent the house to myself so I can expense repairs over the next month or two or is there a prohibition on self-dealing that would affect this situation?
I know there are rules concerning related party transactions, I am just not up on them.
You also have a logistic problem. If you sold your house to your S-corp in an arm's length transaction, where will the money come from -- the shareholder(s). Because an S-corp is a closely held corporation, you will most likely be the majority shareholder so you will really be buying from yourself.
I suspect that the IRS will consider this transfer of equity as a "contribution" at your cost basis. You also have an issue with how you take money out of the S-corp, or how do you pay yourself. I am told that money taken out is ordinary income to you -- forget about the capital gains tax rate.
Your third problem is using a corporation to hold your investment property. How do you avoid having your company "tagged" as a personal holding company and subject to a tax rate that starts somewhere around 35%? There are, I believe, limits concerning how much of the corporate assets can be vested in passive income vehicles, maybe as low as 10%.
As I said before, I am not up on on corporate tax issues; just personal income taxes. I only mention these things, because these questions are among those that should be addressed for you by a licensed tax professional. You might also discuss other business entities that could avoid some of these potential tax pitfalls.