How to Value a House for Tax Purposes
Whether you sell, purchase or keep a house as a rental property, you need to determine its value for tax purposes. The rules are slightly different for each type of transaction you're reporting, but all are fairly straightforward. For tax purposes, this value is known as your "basis" in the house. Receipts and documents pertaining to any house you own should be kept in a special envelope or file folder with your tax papers.
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Things You'll Need
- Closing papers for purchase
- Receipts for improvements made
- Detailed list of appliances
- Depreciation info from previous tax returns
- Property tax statement, if depreciating
- Closing papers for sale, if applicable
Instructions
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Record the total amount you paid for the home as it is reported on the closing papers at the time of purchase, regardless of how the property will be used. Add to that the closing costs you paid, such as title search fees, real estate agent commissions, attorney fees, etc. Do not include amounts paid for property taxes or hazard insurance.
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Total the cost of all permanent improvements made to your main home while you owned it. Add this amount to the original purchase costs and improvements made immediately after the purchase. Also make note of all closing costs at the time of sale, escrow fees and repairs you were required to make at the time of sale. All should be included in the home's basis when gain or loss is computed for tax purposes. You are generally allowed to exclude up to $500,000 worth of gain ($250,000 if filing "single" or "married filing separately") on your main home. To qualify for this exclusion, you are required to have lived in the home at least two of the five years immediately prior to its sale, and you must own the home for at least two full years. If your entire gain is excludable, you do not need to report the sale on Schedule D. All gain or loss on a second home should be reported on Schedule D.
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Add the total cost of all permanent improvements and additions you make to a rental property to get it ready for the first tenants. This might include a new roof, carpet, plumbing fixtures, landscaping, driveways, etc. Do not include appliances, as those will be depreciated separately over a shorter recovery period. Later additions and improvements should be recorded separately on the tax return in the year they are added. Now take a look at your property tax statement to determine the approximate value of the land. The land value must be deducted from the depreciable basis. If there is another record that better demonstrates the true land value, you may use the most appropriate amount as a deduction from the total value.
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Add back the land value when you report the sale of a rental house. While land isn't depreciable, it is included in the tax basis of the property at the time of sale. Each improvement or other asset reported on the depreciation form (Form 4562) while the property was owned should be reported as a separate part of the sale price on the final tax return. Form 4797 requires that you show the depreciation taken on each of those items over the life of the rental property. Note that the IRS uses the terms "allowed" or "allowable" when referring to depreciation. This means you must deduct depreciation you were allowed to take, even if you failed to take it. After deducting allowable depreciation from your total basis in the property, the sale price is deducted to determine whether you had a gain or loss for tax purposes.
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