How to calculate depreciation schedule for inherited property I'll use as rental investment after rehab

So if I understand correctly, I should get the place appraised now, before doing any work on it? Would the appraisal need to separate the land value from the building value since only the building can be depreciated? Also, what about the transfer - was this a gift or did the aunt sell it to them? Does that matter?

Yes, getting an appraisal before starting any work is ideal. This establishes your baseline FMV at the time of transfer. The appraisal should indeed separate the land value from the building value, as you're correct that only the building portion can be depreciated (land is non-depreciable). Whether the property was a gift or sold to you does matter for tax purposes. If it was a gift, you generally receive the property with the donor's adjusted basis for capital gains purposes, but for depreciation, you would use the FMV at time of transfer. If it was sold to you below market value, there might be gift tax implications for your aunt.

Did it actually work with inherited property situations? I'm in a similar boat but mine came from my parents who passed away last year, so there's the whole step-up in basis thing too. Does it handle all that complexity?

I'm always skeptical of these "tools" - couldn't you just ask your accountant to do this? How much does this service cost compared to just paying a CPA for an hour or two?

Yes, it absolutely worked for my inherited property! The system specifically asked about the transfer circumstances (gift vs. inheritance) and handled all the basis calculations correctly. It even flagged items that would qualify for special treatment based on my specific situation. I tried working with my regular accountant initially, but he wasn't a rental property specialist and kept giving me conflicting information. The service was actually less expensive than what my accountant quoted just for setting up the depreciation schedule, plus I got much more detailed documentation and explanations that I could actually understand.

How does this actually work? Like do they just call the IRS for you? I don't understand how they can get through when nobody else can. Sounds sketchy.

Yeah right, nobody gets through to the IRS in 15 minutes. I've been calling for three weeks about my amended return and still can't get through. If this actually worked the IRS would shut it down anyway since they don't want people bypassing their ridiculous wait times.

They don't call for you - they use technology to monitor the IRS phone lines and then call you back when they detect an opening. You still talk directly with the IRS yourself, they just handle the waiting part. It's completely legitimate and uses the same phone systems businesses use for efficient call routing. It's not some magic backdoor to the IRS - it's just smart use of technology to navigate their phone system efficiently. I was skeptical too until I used it and got through in 12 minutes after spending days trying on my own. The IRS has no reason to shut it down because you're still going through their normal channels, just more efficiently.

Is cost segregation worth it for a smaller property? I've heard the studies can be expensive. At what property value does it start making sense to do this?

Cost segregation definitely makes more sense as property values increase, but there are now more affordable options for smaller properties. As a rough guideline, properties valued at $400,000+ can usually benefit enough to justify the cost, but it depends on your specific situation. Some tax software now includes simplified cost segregation tools that are much more affordable than the traditional engineering-based studies. These can work well for single-family or small multi-family properties. The higher your tax bracket, the more valuable the accelerated depreciation becomes, so that's another factor to consider when deciding if it's worth it.

Thanks for mentioning the "placed in service" timing - that's something I was confused about! So even though I own the property now, I can't start depreciating until after all the rehab is done and I'm actively trying to find tenants?

Exactly right! The "placed in service" date is when the property is ready and available for rent, not when you acquire it. So if you're doing major rehab work, you'll need to wait until the property is in rentable condition before you can start claiming depreciation. However, don't forget that the improvement costs you're putting into the rehab will become part of your depreciable basis once the property is placed in service. So while you can't depreciate during the rehab period, those improvement costs aren't lost - they get added to your basis and then depreciated over the 27.5 year schedule starting from your placed-in-service date. Keep detailed records of all your rehab expenses separated by repairs vs improvements, as @a54173a88722 mentioned earlier. This documentation will be crucial when you're ready to start your depreciation schedule.