I have 2 investment properties in Euclid, Ohio.How do I determine the basis and depreciation for tax purposes.

Question

I bought first property for $119,000 in September of 2005 and the second property for $127,000 in January of 2006. When I used tax filing software to do my taxes for 2005 and again for 2006,the software indicated that I had zero depreciation for both years.What am I doing wrong. It too late to do anything about last year taxes, but I have not filed my 2006 return as yet. I was told by people with investment propert that I could claim depreciation as soon as the houses became marketable.Is there a mistake that I made or is the mistake with the software?

Answer 1

You must be doing something wrong with the software. Your basis is what you paid, plus the cost of any improvements. For depreciation purposes you must subtract the value of the land since land is never depreciated. You then divide the remaining basis by 27.5 to arrive at your annual depreciation amount.

It's not too late to correct last year's return. File an amended return on Form 1040X to correct prior year returns.

Answer 2

You would only claim depreciation if these are rental properties, not if you are buying and selling the houses.