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Contributor

Rental House Depreciation

I've got a question for some of you more knowledgeable folks.  My sister and I inherited the family farm this past Jan. The house was rented until this past Sept.  I think I can depreciate the house as rental property, but what do we use as our value to base the  depreciation amount on?  Also if we don't have a renter this coming year can we still take depreciation? How long can we take depreciation if we don't have a renter?  Maybe it's better to take the depreciation and let it set than to spend a lot on the old house to get a renter. Getting a good renter proved to be a problem for dad many times over and he spent a bundle to get it to where it was in OK shape for the last renter. We'd have to spend another chunk to really make it nice. Even then it would still be an old farmhouse that costs a small fortune to heat. It's going to take more than just a high efficiency furnace, and I'm not sure we'd be able to rent if for enough to get our money back even in a few years. My guess is once they spent a winter or two they'd take off and we'd be in the same boat. The way it sets on the rest of the farm makes selling it more of a problem than a solution too. It's a shame to tear it down, but if it won't pay it's own way I can't see keeping it.  Can we let it set and depreciate this house then if we can't get a renter in a reasonable time tear it down?  We could at least salvage the solid wood doors, replacement windows and maybe some woodwork to cover some of what it's going to cost to carry it over this winter while we decide what to do.   

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9 Replies
Advisor

Re: Rental House Depreciation

   It's been almost 20 years since I started renting out the original farm house here but I'll try to help.  For the value for depreciation you can either have it appraised or go by the county taxable value.  Your tax advisor will know for sure.  I have been in the home/apartment rental business for 30 years.  When the renters know you aren't close by or will rarely look the place over you can expect problems.  The house I am currently renting out was my childhood home and it sits only a couple hundred feet from my house with all the barns in between us.  In 20 years I have had very few problems.  One of the worst was some idiot shooting off fireworks over a wheat field behind the house just days before harvest.  I see more cons than pros in your situation.  It sounds like good renters are hard to come by in your area.  If you can put some money in it and get good rent for it, do it.  If not, don't.  Cheap rent will only attract lousy renters.  People are the same everywhere.  They all want to live as high on the hog as possible.  High rent attracts higher class people.  Cheap rent, you know the rest of the story.

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Senior Contributor

Re: Rental House Depreciation

The IRS, if they ever audit your return will question your value if you do not follow guidelines set by them.  Your basis from which you can depreciate will be determined by either what you paid for the property, or like in your case, the value determined at the time the house passed to you.  If your parents or whom ever gave you the house did any work on valuing the estate (attorney, estate accountant), they should have a figure for you.

 

This value should reflect fair market value at the time of transfer, not just some number pulled out of the air.  If it appears to be excessive, the IRS will throw it out and determine its value for you.

 

As for leaving the house empty and taking the depreciation, you may get away with that for a while, especially if you can show you are making an effort to rent the property.  Multiple years of net losses will trigger a look at the expense, especially when no income offsets the expenses.  I've not read the rules on this part but I suspect there are rules governing this as well.

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Contributor

You have no options------- depr basis is equal to value used in estate, and...

 if held out for rental, you must depr.....and, all rental activities (absent being a real estate professional) are passive activities, and the losses could be limited.

 

In your case, I would bet the loss from the house would be less than 25000, which is the threshold.

 

In addition, if you are renting other real estate, such as the farm, that provides you with income which can be offset.

 

For the depr basis---------it is whatever was used as the value in estate return.........check with the attorney.

 

 

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Highlighted
Contributor

Re: Rental House Depreciation

Thanks everybody. We had the farm and house appraised and we have the tax records so we have a basis we can use

to establish a value.  So it sounds like I can  take depreciation this year since we had rental income, and maybe next year

while we are deciding if we hang onto the house or not.    We have the ground custom farmed so we have other farm income and expenses and the rental income only pays part of the real estate taxes,  By getting rid of the house we might  bring then down enough to save more than the rent we were getting.  I'll talk to a tax accountant on this one for sure.  If I can take depriciation for a while it will be great, but the farm is only a nice source of extra income for my sister and me.  It's not the main source of income for either of our familiers and we don't need to get into trouble trying to pare down the farm income.

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Advisor

Re: Rental House Depreciation

Don't know the house or its vintage, but I'd say that if you can let it stand without drawing vagrants, it is doing no harm, and might be an asset someday.  Old houses have a lot of "embedded energy" and thus money tied up in them.  I have formally studied historic structural repair and restoration, and hate to see any old building taken down, unless it is really for current safety reasons. 

As a rule, intact, they are worth far more than the sum of their parts.  Flooring is extremely hard to salvage cost-effectively, unless you want to learn how to do it right, and know what to do with the resulting planks.   Forget replacement windows being re-usable for the most part.  They rarely last more than 10-15 years in the place they were custom made to fit.  I would never expect them to travel to a new site well, and feel that you would surely lose any existing warranty if you moved them.  . 

Think of salvage this way:  It costs a lot to accomplish, because you have at least double to triple the labor - taking it out, restoring it to useful condition, and putting it back in - and there is potentially a high percentage of lost/damaged material as well.  Usually takes some pretty expensive tools and eqiuipment to accomplish, too.  Been there and done that. 

You are right that energy for heating is a big bottleneck for making such a home liveable.  We've watched a younger couple we know move into a rental home here in the county in September, and not being able to afford to heat it this cold fall and winter.  They have had to rely on family to help them foot the energy bills. and had tapped most of them dry by January, with a lot of cold days and nights left ahead.   

Like you, I figured there was a reason why this house sat empty for a couple of years...basically since oil prices started their latest sharp incline.  It's a beautifdul house, in reasonable condition, but not practical unless it's really restored, re-wired so electric space heaters can help with zone heat, insulated and the windows repaired and storms put on.  The landlord won't spend a cent, and it may not make sense to do so.  As you say, it takes a long while to get back your investment. 

Our youngest daughter heats with wood for this reason, since she moved into her Gran's little frame farmhouse a few years ago.  When oil hit $2 a gallon,, it was no longer a good idea to use the oil boiler there.  We'd rather keep her in firewood, than have to help her pay an oil bill of several hundred dollrs a month for a house she's only in a few hours a day. 

One good fireplace insert (on a well-lined, modern flue) keeps the whole area she occupies comfortable for next to nothing.  I'll put a wood boiler onto the hot water system if I think she plans to stay there much longer, or we could do that for the right tenant down the road.  I always look at that house as one we might need to move back to someday, that we could occupy inexpensively, as long as we wood heat..and, the insert is already there, with 150 acres of our trees all around it. 

A home that has little or no use now, if you can just keep a decent roof over it, is a potential retirement home,  maybe a vacation getaway.  If it's not really costing you anything, maybe a few bukcs in insurance and taxes, and not earning you anything, then it's a wash to me.  I know I am not the smartest financier in the world, but not every asset has to earn constantly to me. 

This house we live in sat for at least forty years empty, and with only a partial roofing-over with tin.  I think that was done to keep some peanut vine bales dry for feeding cows.  It had no doors or windows left on it, and had some fairly big trees growing up too close to it. 

We saved most of it, though, and I am so much happier with it than I would have been with a modern replacement.  It is unique in the way that only old, vernacular houses can be, even though due to pressures of time,  we had to remodel, rather than doing a proper restoration.   Builders had their own style and stamp on things back then.  The materials were usually locally-grown and milled. 

Empty houses can decay rapidly, but I'd rather mothball one than have the wrong tenant in it.  I'd especially want to hold onto a family house...we've lost a couple  (actually three, now that I think about it) for various reasons - one due to significant fire damage, and two for mining.  

I miss them.  Not so much because they worth so much, but because the sense of :"home" disappeared when they were torn down.  Be really sure you want to give that up, before you call for a dozer. 

We've seen some old houses made into hunting lodges, and rented for high sums, on the right tract of hunting land.  Those guys will spend anything, just to have a hangout.  I have a cousin who guides quail hunts on his farmland parttime, and he's told me he'd give his eye teeth for an old tenant house to fix up as a lodge. 

Someone nearby your property might be in a similar state of need.  I know of at least a dozen of these within  20 minutes of our farm, and ours would suffice easily, if we ever decided to move to town or back home.  The lodge and the hunting land do not have to be right in one spot...just near enough by for convenience to each other.  In the right place, it could make a nice hobby farm/summer home for the right people, too. 

At least three of us cousins have fixed up old farmhouses to occupy, either as startup homes, or for us, as probably a retirement one.  Everything we do to this one now is aimed at aging in place.  To me, an old house is the perfect place to do that in....

Just some food for thought.  .I plead the case for saving old houses - and their outbuildings -  if possible. 

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Senior Advisor

Re: Rental House Depreciation

The land the house sits on may be worth more than the land with the house. Burn it down and bury it and never look back.

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Veteran Advisor

Re: Rental House Depreciation

  The more remote it is, the less market value it has in terms of rent. You will be competing against the volatile LPG and heating oil prices, and it can be compounded by gas prices, because the house doesn't have access to cheap utilities. There's a reason why it's in the shape that it is and it's because the rental income didn't justify the improvements.

  Cut your losses and advertise anything of value such as cabinets or woodwork and even the mechanicals. If you don't have the time or the easy access to it make the asking price of those things dependent upon the buyer removing them because of potential damage issues when removing any items. Look into a local fire department using the house for training to burn down cut down on demo costs.

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Senior Contributor

Re: Rental House Depreciation

Perhaps you can look back over the estates records and get an even better idea of what it cost to maintain the house.  I rented out some houses for my mother for about 10 years and would not get back in the landlord business.  There is a steep learning curve, in my experience.

 

You might consider seeing if an agent would take over management for you.  If nothing else, this might give you another perspective on the costs and returns.

 

Right now, you're carrying insurance on it, paying taxes on it, heating it enough so the pipes don't freeze and worrying about someone vandalizing it.  Even worse, it might be considered an attractive nuisance and some idiot could get hurt and sue you (OK, I'm paranoid).

 

You could give it away if it were moved (not a likely event).  Sometimes some ethnic gorups (like Amish) will tear it down and move it, probably not going to pay you anything.  Perhaps the local fire department will burn it for practice, but you are still left with the clean up.  Maybe you can work a deal with the renting farmer to remove or destroy it.  If it has a basement, it can be useful to burn it in place and push the walls in.

 

If you remove the house, be sure to cap any wells and take care of cisterns and septic tanks for liabilty reasons.

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Senior Contributor

Re: Rental House Depreciation

It is also not likely to be moved if it isn't "free." Moving costs can clearly outstrip the value of any house, even the newer ones. Word of mouth will tell you what your options are.

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