Depreciation, How Does It Work?
Do you depreciate a home from it original value? Here is my problem. I bought a fixer upper for 30,000 (30,000 dollar loan) and I stuck 10,000 into it. I then got it reappraised because I wanted to refinance to get some cash out of it to pay off the credit card that I used to fix it up. It assessed for 54,500 and I took out a loan for 40,000 for the refinance. So what amount do I use for the depreciation, the 30,000 or 40,000? Thanks
If the $10,000 cannot be expensed then it is capitalized and added to your original basis of $30,000 to give a current basis of $40,000. If you put this into business use (such as rentals) then you depreciate your business "equipment", (i.e. the building).
When you sell the property there will be two components to your capital gain. Suppose you hold it for 5 years and it sells for $90,000. Suppose that you have depreciated the property by $5,000. Your capital gain will be $90K-$40K - $5K = $55K. The $5K of depreciation will be taxed at 25% while the remaining $50K of gain will be taxed at 15%.
I hope this helps.
Regards,
Ed
Yes, I bought the home for 30,000 and rght now it is up for sale.
We bought it to fix up and then sell again. The land is worth 9,000 dollars, so that from what I understand would be subtracted from 30,000. From what I gather, I can depreciate it from the 40,000 minus the 9,000, correct?
Ordinarily, you would be correct for investment property. Flip property, however, is not investment property but instead is dealer realty (merchandise or inventory to your business).
Merchandise is not depreciated. Your initial basis of $40K would be used to calculate your profit on the sale. Consult your personal tax professional on how to prepare your Schedule C and Schedule SE to report your sale profits.