Depreciation!!
I purchased a rental last year . It has appreciated in value over the past 1 year. I am trying to determnine if you use the market value for the current tax year to calculate depreciation or do you use the purchase price?
You use the depreciation basis which is established by your original purchase price plus the cost of any capital improvements you made and minus the value of the land the building/structure sits on.
Your depreciation basis does not increase year to year just because the property appreciated. Depreciation for a residential rental building is taken over 27.5 years. The IRS has a publication that discusses depreciation, and shows you how your first year depreciation allowance is based upon the month you put the property into service.
Depreciation is optional and may be taken each year. If you choose to waive depreciation, the IRS will tax you for depreciation recapture anyway because you were allowed a certain amount of depreciation. So you may as well take the allowed depreciation each year because you will be taxed on it anyway when the property is sold.[ Edited by DaveT on Date 02/12/2004 ]
Thanks DaveT that was very helpful.