Hi, I am trying to calculate the basis of my rental property for late tax filing for 2008. It's kind of a complicated scenario (at least to me). I hope someone here can offer some advice.

Here's some pertinent dates:

Purchased home in 2007 as primary residence
Refinanced home in May 2008 as primary residence
Began renting home in June 2008 through end of tax year

How do I figure my cost basis? Do I use the original purchase price/settlement costs and then add the refinance settlement costs?

Because I lived in the house for the first few months of the year is it considered "personal use?"

I know I have more questions, but that's all I can think of for now.

Steagan:

Since you refinanced the home as a primary residence, the costs of that refinanced in no way is factored into the basis.

The basis of the rental property for depreciation purposes is the purchase price (which CAN include the closing costs on the original purchase) or the fair market value of the house on the date it became a rental property, whichever is LESS!

The personal use portion of the rental property can effectively be ignored when reporting the property on Schedule E.

Thank you for your response ATE. After I purchased the house, I invested around 36k in upgrades to include new carpet and appliances. I will add those to the purchase price and settlement costs to determine the cost basis of the house, since it will be less than what it was appraised for in April 2008.

To calculate depreciation, do I start with the purchase price of the carpet and appliances and begin depreciation on those items when my renters moved in, or do I calculate some depriciation while they were in my personal use since the carpet and appliances were in the house for about 6 months before they moved in?

Steagan:

Both the carpet and appliances are depreciately separate from the house, because their depreciation periods are much less than the 27.5-year depreciation life of your house.

You start the depreciation when you BOUGHT the carpet and appliances, but you deduct only the depreciation that accrued after the renters moved in.

Oh, I see. It is starting to make sense now. Thanks ATE.

My last concern has to do with the amount of rent I report as income. My mortgage with escrow for taxes came to a monthly payment of $1075. I received $1350 from my renters. Do I report the full $1350 as income or the difference between the rent and my mortgage?

ATE: I assume you can accept tips through Paypal?

You report the entire $1,350 as income on Schedule E, then, further down the form, report the interest from the mortgage as a deductible rental expense.

Yes, tips via PayPal are just fine; please see my visitor's message to you for my PayPal account name.